While Moodys central scenario remains that the euro area will be preserved without further widespread defaults, even this positive scenario carries very negative rating implications in the interim period, the agency said in a report.
Moodys also noted the political impetus to implement an effective resolution plan may only emerge after a series of shocks, which may lead to more countries losing access to market funding and requiring a support programme.
This would very likely cause those countries ratings to be moved into speculative grade in view of the solvency tests that would likely be required and the burden-sharing that might be imposed if (as is likely) support were to be needed for a sustained period, it said.
Economist Tim Condon, head of research for Asia at ING, said the Moodys statement was unlikely to surprise markets. Its basically common knowledge that everything in Europe is at risk, he said. Quite a few people are contemplating a euro zone breakup scenario.
Financial markets have put Italy, Spain and now France under increasing pressure on scepticism of the ability of European leaders to resolve the debt crisis, that has already sparked financial bailouts for Greece, Portugal and Ireland.
Italian Prime Minister Mario Monti aims to shore up the strained public finances this week by unveiling measures that could include a revamped housing tax.
Euro zone finance ministers are due on Tuesday to consider detailed operation rules for the areas bailout fund. Approvals will clear the way for the 440-billion euro ($583.83 billion)fund to attract cash aimed at boosting the funds resources.
Moodys said the euro area is approaching a junction, leading to either closer integration or greater fragmentation.
The likelihood of even more negative scenarios has arisen in recent weeks, Moodys noted, reflecting political uncertainties in Greece and Italy and a worsening of the regions economic outlook, among other factors. The probability of multiple defaults by euro area countries is no longer negligible. In Moodys view, the longer the liquidity crisis continues, the more rapidly the probability of defaults will continue to rise, it said.
Such defaults would increase the chances that one or more members of the bloc would leave the euro area. Moodys believes that any multiple-exit scenario in other words, a fragmentation of the euro would have negative repercussions for the credit standing of all euro area and EU sovereigns.
In the absence of major policy initiatives in the near future that stabilise credit market conditions, or markets stabilising for any other reason, the point is likely to be reached where the overall architecture of Moodys ratings within the euro area, and possibly elsewhere, within the EU, will need to be revisited.
Euro zone staring into the abyss
Brussels : The euro zone is staring into the abyss.
Unless European leaders agree on a political remedy for their sovereign debt crisis at a December 9 summit, and the European Central Bank then intervenes massively to support government bonds and European banks, the euro may start to unravel.
Foreign investors are already shunning euro area sovereign bonds, European banks are desperately trying to sell assets including bonds, depositors are withdrawing growing amounts from southern European banks, and interbank lending is freezing up, forcing ever more lenders to turn to the ECB for funds.
Italy, the third largest and most vulnerable euro zone state, has a mountain of debt to refinance from January, and its short-term borrowing rate hit an alarming 8% on Friday.
Josef Ackermann, CEO of Deutsche Bank and chairman of the Institute of International Finance, the world banking lobby, delivered a stark message to European Council president Herman van Rompuy last week, according to a source. Allowing political indecision to continue into the new year risks a dramatic worsening of the crisis on financial markets, Ackermann warned Rompuy and other officials.
Senior EU and ECB sources, who spoke privately, said there was an understanding that if Europes political leaders take a big step towards a fiscal union on December 9, that would give the ECB grounds to intervene more decisively. One key unknown is whether all 27 EU states will agree to amend the treaty, or whether a separate accord will be struck among the 17 euro zone members.