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September 23, 2017

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Markets mixed after Moody's lowers outlook on EU credit

PARIS/HONG KONG--European stock markets fell Tuesday but the euro was firm and tension on bond markets eased following a Moody's downgrade of the outlook on the EU's long-term AAA credit rating from stable to negative.

Moody's said its move reflected credit risks faced by key European Union budget contributors, including Britain, France and Germany, all of which now have negative outlooks due to the continent's economic crisis.

"It is reasonable to assume that the EU's creditworthiness should move in line with the creditworthiness of its strongest key member states," a Moody's statement said.

Major European stock markets were lower in midday trading, with London's FTSE 100 index falling 0.73 percent, the Paris CAC-40 down by 0.36 percent and Frankfurt's Dax off by 0.22 percent.

Moody's said the main reasons for holding its highest rating for the bloc at the moment 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 did not exclude the possibility of a future EU downgrade however, saying 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.

Michael Hewson, CMC Markets analyst called Moody's decision "a book keeping exercise, more than any change in perception about the EU's financial position.

"It brings it into line to reflect the negative outlooks to the main contributors to the EU budget," Hewson noted.

He added however that the downgraded outlook highlights concerns about debt sustainability and growth prospects of the main EU contributors.

In July, Moody's 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.

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