Germany's AAA credit rating on 'negative outlook'
Credit ratings agency Moody's has changed its outlook for Germany's AAA credit rating to negative, the first step towards a possible downgrade.
Moody's said the country was at risk from the increased likelihood of a Greek exit from the euro and the need to provide more support to Spain.
Concerns are growing that Spain will have to seek a full bailout.
Spain's short-term borrowing costs rose on Tuesday at a government bond auction.
Spain paid an interest rate of 3.691% to borrow funds for six months, compared with a rate of 3.237% it was charged one month ago.
In another sign of investors' wariness of Spain, the yield on its 10-year bonds remained near record-high levels at 7.55%.
Other countries were also seen as potentially growing more vulnerable.
The Netherlands and Luxembourg - both AAA rated economies - were also put on negative watch.
A "negative outlook" posting from Moody's, one of a handful of agencies that assess the creditworthiness of borrowers, reflects a higher risk that the actual rating will be cut at some point in the next two years.
Earlier this year, Moody's put France and Austria's AAA ratings on negative outlook.
Moody's said there was an increased chance that Greece could leave the eurozone, which "would set off a chain of financial sector shocks".
It added that policymakers could only contain these shocks at a very high cost.
Germany has not reacted formally to the threat of a downgrade of its credit rating, but finance minister Wolfgang Schaeuble, told the popular and influential newspaper, Bild: "Germany's strengths are, naturally, not endless, but we are still as solid as a rock."
The German government points out that the Spanish case is different from the Greek situation. Mr Schaeuble said: "Spain's economy is much more powerful and has a different structure - the country will be back on track soon."
But there is much concern about Greece in Germany, particularly as the troika representing the country's bailout creditors (the IMF, European Commission and European Central Bank) re-open talks with the government in Athens to get its economic programme "back on track", as the IMF put it.
But the possibility of Greece leaving the euro is now openly discussed in the government in Berlin. Economics minister, Philipp Roesler, said: "If Greece no longer meets its requirements there can be no further payments". He added: "A Greek exit has long since lost its horror."
In other developments:
- Representatives from the troika of international lenders are due to arrive in Greece to assess its progress towards reducing its debts
- Their visit coincides with news that the eurozone private sector shrank
- But there was a glimmer of better news from China, where manufacturing is 'picking up'
The troika - the International Monetary Fund, European Commission and European Central Bank - must decide whether Greece is eligible to receive 31.5bn euros - the last tranche of a 130bn-euro ($158bn; £102bn) aid package agreed in March.
Greece is behind in its plans to cut spending and debt because its economy is shrinking faster than forecast.
Separately, the German Finance Minister, Wolfgang Schaeuble, is to meet the Spanish Economy Minister, Luis de Guindos, in Berlin.'Burden'
Moody's warned that Germany and other highly-rated countries may have to increase levels of support for countries such as Spain and Italy, who have not asked for a Greek-style bailout but who are struggling with high debt levels.
It said in a statement: "Even if such an event [a Greek exit] is avoided, there is an increasing likelihood that greater collective support for other euro area sovereigns, most notably Spain and Italy, will be required.Continue reading the main story
"This burden will likely fall most heavily on more highly rated member states if the euro area is to be preserved in its current form."
Jim O Neill, the chairman of Goldman Sachs asset management, said the European Central Bank needed to take radical action.
"If Italy gets into already the kind of pressure that we now see on Spain, there would be contagion into the French markets probably... so the policy makers have got to do something a little bit more decisive in terms of monetary interventions," he said
Lena Komileva, the chief economist at the investment research company, Gplus Economics, said she too was worried about problems escalating.
Ultimately the risks to Germany in becoming the eurozone's paymaster cannot be disguised”
"My concern is that an outright sovereign bailout is such a politically unpopular measure that it might just happen too late, which means that Spain will continue to bleed contagion into the rest of the eurozone for the remaining of the year.
"Italy of course is an open target for contagion, but I'm increasingly concerned about the position of France."
The German Finance Ministry said the country would remain strong, and said that Moody's was focusing on short-term risks.
"By means of its solid economic and financial policy, Germany will retain its 'safe haven' status and continue to play its role as the anchor in the euro zone responsibly," the ministry said.
Rival agencies, including Standard & Poor's and Fitch, have Germany on the AAA top rating with a stable outlook, implying they do not currently foresee a weakening of its financial position, although all agencies regularly review their rankings.