Moody's downgrades EU rating outlook to 'negative'

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Moody's on Monday lowered the European Union's long-term issuer rating outlook from stable to negative, saying the move reflected credit risks of the bloc's key budget contributors.

"It is reasonable to assume that the EU's creditworthiness should move in line with the creditworthiness of its strongest key member states," it said, citing negative outlooks for Britain, France, Germany and the Netherlands.

Despite Moody's pronouncement, the euro rose to a two-month high of $1.2618 in Asian trading on Tuesday, compared with $1.2598 late Monday in London trade.

Dealers were keeping faith with the euro amid rising expectations that the European Central Bank (ECB) will on Thursday announce a round of sovereign bond purchases from struggling economies.

Investors also brushed off data that showed eurozone manufacturing activity contracted for a seventh straight month in August.

Moody's maintained the EU's triple-A rating, saying its "two key rationales" for assigning the bloc its highest rating remained unchanged: its "conservative budget management" and "the creditworthiness and support provided by its 27 member states."

Britain, France, Germany and the Netherlands - which together account for about 45 percent of the EU's budget revenue, according to Moody's - also maintain a AAA credit rating.

The agency, however, did not exclude the possibility of a future EU downgrade, saying in its statement that a "deterioration in the creditworthiness of EU member states" could prompt such a move.

"It is reasonable to assume the same probability of default by the EU on its debt obligations as the highest rated key members states' probability of default," Moody's said.

The agency said while there were "structural features in place that enhance the EU's creditworthiness," they were "not sufficient to delink the EU's ratings from the ratings of its strongest key member states."

"Additionally, a weakening of the commitment of the member states to the EU and changes to the EU's fiscal framework that led to less conservative budget management would be credit negative," it said.

Conversely, the bloc could regain a stable outlook for its ratings should the rating of the key triple-A budget contributors also return to stable, it added.

Moody's in July lowered the ratings outlook of Germany, Luxembourg and the Netherlands to negative, saying the "level of uncertainty about the outlook for the euro area" was no longer consistent with stable outlooks for the countries.

France and Austria have been under a negative ratings outlook since February, and Britain was assigned the same status in December.

Greece is trying to renegotiate terms of its second bailout, while Spain is under pressure to also request bailout aid in coming after accepting help to recapitalize its broken banking system.

Struggling economies such as Spain, Italy and Portugal are desperate for help to push down their borrowing costs and hope they will receive some good news later in the week.

ECB chief Mario Draghi on Monday defended controversial measures to tame the eurozone debt crisis, including buying up government bonds.

Members of the European Parliament said Draghi, widely expected to announce further details on Thursday of how the ECB will ease the pressure on struggling eurozone states, told them that the central bank had a responsibility to intervene when necessary.

Draghi, who made no public comment, said that buying government bonds of up to 3-year maturities on the secondary market did not amount to bailing out spendthrift euro members - a charge levelled by many German politicians.