When Moody's Investor Service placed a negative outlook on the Aaa ratings assigned to Germany, the Netherlands and Luxembourg on Tuesday, the ratings on entities closely associated with these sovereigns were similarly affected. In particular, the Aaa ratings assigned to two state-sponsored development banks - KfW and Rentenbank - and the "bad bank" from the rescue of Hypo Bank - FMS Wertmanagement - all now have negative outlooks.The three German agencies are substantial bond issuers in the Australian domestic market. Other significant issuers include the Council of Europe Development Bank, Eurofima and the European Investment Bank.Surprisingly, the Aaa ratings assigned by Moody's to these latter three organisations still have stable outlooks. This is surprising because Moody's also changed the outlook on the Aaa rating assigned to bonds issued by the European Financial Stability Facility (EFSF) this week, and the Aaa provisional rating assigned to the entity itself to negative. It seems it may be only a matter of time before the rating outlook on these latter entities is also revised to negative. A negative outlook indicates there is some likelihood that within the next year or so the rating will be downgraded. The possibility of a rating downgrade from Aaa for these six European multilateral organisations and agencies gives cause for concern. They have been substantial bond issuers in the Australian domestic market, with a combined A$60 billion of bonds outstanding, and are a major source of repo-eligible securities. The Australian banks hold these bonds in their liquidity portfolios for use on a day-to-day basis in repo transactions with the Reserve Bank. The banks will also hold the bonds in anticipation of the introduction of the Basel III Liquidity Coverage Ratio, which will come into effect from 2015. While the Australian Prudential Regulation Authority has already said these bonds will not qualify as Level 2 assets for the purpose of meeting the requirements of the LCR, the bonds will be accepted by the RBA as collateral for the Committed Secured Liquidity Facility that it will provide to allow banks to meet their LCR obligations. If bonds from these issuers are no longer acceptable to the RBA, the number of acceptable SSA issuers will fall by more than one third.This may explain the three issues this week from African Development Bank. The two lines that AfBD tapped are accepted by the RBA.However, the loss of repo-eligibility may be the least of the problems caused by these issuers losing their Aaa ratings from Moody's. There are also adverse implications for the basis swap and therefore the cost to Australian entities of borrowing offshore.According to ABS data, the banks hold about A$17. 5 billion of the A$110 billion of outstanding kangaroo bonds and a further A$25 billion are held by pension funds. Foreign investors (such as central banks and sovereign wealth funds) hold another A$54 billion. Virtually all of the bonds held will be "triple A" rated and many of the investors will be guided by the lowest rating assigned, as is the