Moody's lowers to 'negative' outlook for a rating of European rescue fund

NEW YORK, N.Y. – Moody’s Investors Service on Tuesday lowered to “negative” the outlook for its debt rating on the European currency zone’s temporary rescue fund. The rating agency noted the move comes a day after it lowered the outlook for its ratings on Germany, the Netherlands and Luxembourg.

Germany has a large stake in the €440 billion ($532 billion) rescue fund. The Netherlands and Luxembourg also have stakes in the fund, though they are much smaller.

The mounting uncertainty over the debt crisis and the possibility that those stronger economies will have to provide aid to Spain or Italy prompted the move Monday to lower the three countries’ debt outlook, Moody’s said.

The debt crisis has flared anew as fears intensify that Spain, the fourth-largest economy in the euro group, would be next in line for a government bailout.

Moody’s said Tuesday it is revising its outlook to “negative” from “stable” for its top Aaa rating on some of the European Financial Stability Facility’s long-term debt. That puts investors on notice that the rating could be lowered.

Erosion in the creditworthiness of Germany, the Netherlands or other stronger countries could trigger a rating downgrade for the fund, Moody’s said.

Countries in the euro currency group issue “irrevocable and unconditional” guarantees in proportion to their share in the capital of the European Central Bank, Moody’s noted. Countries’ shares are increased in proportion to make up for the other member countries that are in shaky financial condition — Greece, Ireland and Portugal.

The temporary rescue fund is to be replaced by a permanent, €500 billion European Stability Mechanism when it’s up and running — which won’t be before September.

European leaders agreed at a summit last month that the ESM will eventually be able to funnel money directly to distressed banks — rather than governments — once an effective European banking supervisor is set up.

The German government downplayed Moody’s decision to lower its outlook on Germany’s debt rating. It said the risks cited by Moody’s weren’t new and were largely based on a short-term assessment.

Germany “remains in a very solid economic and financial situation,” the German finance ministry said.