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Citing budget risks of EU members, Moody's lowers outlook to 'negative'

NEW YORK -- 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 US$1.2618 in Asian trading Tuesday, compared with US$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.

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