warning that the euro crisis could cost Germany its prized triple-A credit rating is stepping up pressure on Chancellor Angela Merkel to take bolder action, but also stiffening domestic opposition to further bailouts, including within her ruling coalition.
Moody's Investors Service changed its outlook on Germany, the Netherlands and Luxembourg to negative from stable late Monday, citing what the ratings company called an increased risk that Greece could leave the euro zone and the costs of containing subsequent contagion. Even without a Greek exit, Moody's said, there was a growing likelihood that those top-rated countries would have to throw more support to Spain and Italy.
Moody's added that some of the risk lay with European leaders themselves. The German-led "reactive and gradualist policy response"—opting to do just enough to prevent immediate catastrophe but not enough to lastingly stabilize the bloc—was increasing the liabilities of the strongest countries, Moody's said.
Finland was spared any warning, making it the only euro member with an unblemished, stable triple-A rating. Moody's cited the country's small and domestically focused banks, limited trade links with the rest of the euro zone and Finland's insistence on obtaining collateral from Greece and Spain as a condition for support.
The agency's warning, less drastic than a ratings downgrade, isn't expected to have a real impact on Germany's borrowing costs and won't trigger an automatic downgrade of its debt. German 10-year bond yields, which remain near record lows, nudged slightly higher Tuesday to 1.24%.
The warning was seen by many analysts as an effort to jolt Ms. Merkel into taking faster, bolder action to stem the euro-zone debt crisis. But the chancellor's ability to do so is likely to be threatened further, because many in Germany's political establishment appeared to draw the opposite conclusion from the report.
Wolf Klinz, a German member of the European Parliament from the pro-business Free Democrats, Ms. Merkel's junior coalition partner, said he doesn't dispute Moody's conclusions about Germany's risks, but rather the timing of the announcement. "There are no hard facts yet" about Germany's ultimate price tag, Mr. Klinz said. "Why come out with this right now? It may have political implications" even if that wasn't the intention, he said.
The Moody's warning confirms that Germany has reached the limit of its ability to shoulder the financial burden of the bailouts, and that only painful reforms in the weakest countries can solve the crisis, a number of lawmakers said Tuesday.
"This warning is important," said Otto Fricke, a senior lawmaker from the pro-business Free Democrats, Ms. Merkel's junior coalition partner. "If Germany gives additional billions in aid without anything changing in these countries, things will move in the wrong direction."
The German finance ministry late Monday sought to play down the Moody's report, saying the risks cited weren't new and that Europe "would do everything to overcome the crisis as soon as possible."
Germany's finances remain in better shape than those of other major economies whose ratings have come under pressure. Its government deficit is expected to reach 0.8% of gross domestic product this year, a fraction of the deficits in the U.S. and Japan, according to the International Monetary Fund.
A broad consensus among Germany's political and financial elite says throwing money at the euro-zone crisis isn't a viable solution. Instead, Ms. Merkel has insisted throughout the crisis that the bloc enforce tough budget discipline, reduce deficits and resist the temptation to unleash the European Central Bank to prop up the bond markets of beleaguered euro-zone countries.
Her motive is part prudent fiscal policy—like many Germans, she has argued that the roots of the euro crisis lie in the wanton spending of Southern European countries and the lack of firm controls over euro-zone budgets. But fear of a voter backlash and a palace revolt of lawmakers in her center-right coalition have also driven Ms. Merkel's cautious approach.
"It is hardly possible to take on new burdens and would be very difficult to explain to citizens," said Hans Michelbach, a conservative lawmaker and financial-policy expert in Ms. Merkel's coalition, rejecting Moody's call for more decisive action.
Germany has committed more than €211 billion ($256 billion) in cash and guarantees to the euro-zone rescue funds, making it their largest backer. As the ECB's largest shareholder, it is on the hook for the lion's share of any potential losses from the ECB's portfolio of Spanish, Greek and other government bonds.
Surveys show a majority of Germans want Greece to leave the euro zone, a sentiment that more lawmakers in Ms. Merkel's government are echoing. German Economy Minister Philipp Rösler said this week in a television interview that a Greek exit "is no longer something to be afraid of," and expressed doubts that Greece could enact the changes needed to receive more aid. A team of European Union and IMF inspectors visiting Athens this week will determine whether Greece is fulfilling its obligations for an additional batch of aid.
Concern that the euro-zone downturn is hurting Germany's economy also is feeding its bailout angst. Purchasing managers' index reports for July, released Tuesday, suggest Germany's manufacturing and export sectors are starting to buckle under the weight of contractions in Southern Europe and slower growth elsewhere.
With Europe's top-rated countries under threat of ratings cuts and the bloc's economy likely contracting, the ECB may come under more pressure to step up its response. The ECB has bought around €220 billion in bonds of vulnerable countries such as Spain and Greece since May 2010. Its ability to create an unlimited amount of euros makes it the only euro-zone institution able to credibly keep a lid on government borrowing costs, many analysts say.
Such steps are controversial, particularly in Germany, because ECB rules forbid it from lending to governments.The central bank has shelved the bond-buying program for the past four months, preferring to keep pressure on governments to improve their own anticrisis firewalls.
"The pressure on the ECB is already immense and will, if anything, get bigger" in light of the rating warnings, said Mr. Klinz, the European parliamentarian. Were the ECB to start buying bonds again in a big way, he said, "this would signal that the last round has begun and all principles have been given up."
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