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Moody's sees European contagion

Moody's Investors Service, in an unusual move regarding its sovereign ratings process, said on Monday it may downgrade its ratings on Portugal, and Greece's rating could fall to as low as junk.

Moody's in a “special comment,” called the sovereign debt crisis “unprecedented.” European Union finance ministers agreed to an emergency loan package on Monday that with IMF support could reach €750 billion ($1 trillion) to prevent a sovereign debt crisis spreading through the euro zone.

The rating company said a drawn-out process for building support for Greece's debt crisis has increased the cost to Greece of regaining control of its public finances, particularly over the last three months.

“Contagion has spread from Greece -- historically a weaker credit in the context of the euro zone -- to sovereigns with stronger credit metrics like Portugal, Ireland and Spain,” Moody's said.

It said rating cuts for Portugal and Greece are possible and it is conducting a four-week review of those countries.

In light of market rumors, “we are taking the unusual step of providing more information about the timing and extent of our forthcoming rating actions,” Moody's said.

Moody's had placed Greece's sovereign debt on review for downgrade in October 2009, and cut its rating by one notch to A2 in December. The rating firm defended its decision to wait for more information from the International Monetary Fund before acting again.

“We could have decided to act more forcefully earlier based on less information,” Moody's said, but the rating company wanted to avoid “shooting in the dark.”

Moody's cut Greece's rating another notch to A3, or the seventh highest rating, in late April and put it on review for further downgrade. Moody's on Monday said a cut to the Baa range or even below investment grade was possible.

Rating agency Standard and Poor's cut Greece's sovereign rating to junk level in April.

Also in the report, Moody's said a downgrade of Portugal's Aa2 rating, the third highest, to Aa3 is “probable” but that a two-notch cut to A1 “cannot be ruled out.”

No significant action on Ireland's ratings are expected in the short run, Moody's said.

S&P also took various rating actions on 33 tranches in European synthetic collateralized debt obligations, or CDOs, including lowering ratings on various tranches of those securities. (Reuters)