Moody's Investors Service said it may consider downgradingdebt ratings for some eurozone nations if Spain seeks a bailout for its bankingsector or Greece ends up dropping the euro as its national currency.
The ratings firm said Friday it is assessing theimplications of a bailout for Spain and is prepared to make rating changes toreflect any heightened risk for Spain's government creditors.
There's growing speculation that Spain could decide withindays or weeks to ask the European Union for a bailout for its banks, which havebeen crippled by soured real estate investments.
If Spain ends up asking for aid, that would make it thefourth country in the 17-member eurozone to do so since the EU debt crisisbroke out.
Under Moody's rating scale, Spain now has a rating of"A3," which is still investment-grade. But the outlook is"negative," which means there's at least a 40 percent chance Moody'swill downgrade its ratings for Spain.
Moody's said Spain's banking problem is largely confined tothat country and not likely to spill over to other eurozone nations, with theexception of Italy — where the European Central Bank has already stepped in tobuy government bonds as a way to help lower the country's borrowing costs.
More nations in the region could be at risk of a ratingsdowngrade should Greece walk away from the euro, Moody's said.
A shrinking economy, untenable debt and a political backlashagainst austerity measures have made it increasingly likely that Greece couldcease using the euro. Moody's notes that would lead to substantial losses forinvestors in Greek securities.
Some experts estimate a new Greek currency would lose halfor more of its value relative to the euro, driving up inflation and sapping thepurchasing power of the average person in Greece.
At the same time, the country's economic output would drop,putting more people out of work where one in five is already unemployed. Theprices of imported goods would skyrocket, putting them out of reach for many.
If Greece stops using the euro, that could threaten theeuro's continued existence, Moody's said.
The ratings firm said nations at most risk of seeing theircredit standing harmed by Greece's departure are: Cyprus, Portugal, Ireland,Italy and Spain. Moody's already holds a negative outlook on those fivecountries.
Beyond those, Moody's said it would review sovereign ratingsfor all eurozone nations.