Grexit would have "serious consequences" for eurozone: Moody's

[LONDON] Greece leaving the eurozone would have "serious consequences" for the eurozone as a whole and raise questions about what could lead other countries to leave as well, ratings agency Moody's said on Tuesday.

Although eurozone governments are benefiting from cheaper borrowing costs thanks to the European Central Bank's aggressive stimulus measures and were expected to see growth gradually recover in the coming months, some - such as France and italy - still face pressures on their credit ratings.

Greece's junk Caa1 rating is currently on review for a further downgrade with the country future's future in the eurozone uncertain under the government of Prime Minister Alexis Tsipras.

Athens has been embroiled for weeks in a confrontation with its eurozone creditors, led by Germany. It is struggling to find EU allies in its effort to renegotiate the terms of itsbailout. The worst outcome - Greece leaving, or "Grexit" - would have wide ranging implications, Moody's said.

"Even if the immediate financial impact was limited, the exit of a member state from a union explicitly designed to be indivisible would inevitably raise questions about what pressures might cause other countries to take the same route," Kathrin Muehlbronner, one of Moody's senior credit officers, wrote in a new report.

The most obvious risk was that other countries on the southern eurozone periphery, such as Portugal, Spain and Italy, would face a backlash from investors that are currently snapping up their bonds.

Overall, however, Moody's saw a stable credit outlook for eurozone sovereigns. It expects the ECB stimulus and the boost from the lower euro and oil prices to offset deflationary pressure.

It stressed, though, that the region is likely to remain one of "only moderate growth." Already high debt-to-GDP ratios in Greece, Italy, Spain and France were expected to continue to rise.

France, currently is the only country apart from Greece to have a negative outlook on its rating with Moody's, was also targetted for making poor progress with spending cuts and reforming its economy.

"France stands out with its (headline and structural) budget deficit forecast being higher in 2015 than in 2013," Moody's said "In our view, many of the 2015 (eurozone) budgets have been based on unduly optimistic assumptions for nominal GDP and tax revenue growth, which are unlikely to be achieved given the lower inflation environment."

REUTERS