Crisis threatens EU sovereign ratings: Moody's

Mon Nov 28, 2011 5:34am EST

A Moody's sign on the 7 World Trade Center tower is photographed in New York August 2, 2011.   REUTERS/Mike Segar

A Moody's sign on the 7 World Trade Center tower is photographed in New York August 2, 2011.

Credit: Reuters/Mike Segar

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(Reuters) - Moody's Investors Service warned on Monday the rapid escalation of the euro zone sovereign and banking crisis threatens the credit standing of all European government bond ratings.

"While Moody's 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.

Moody's 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 program.

"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."

Economist Tim Condon, head of research for Asia at ING, said the Moody's statement was unlikely to surprise markets.

"It's 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 skepticism 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 country's strained public finances this week by unveiling measures that could include a revamped housing tax.

Contacts between the International Monetary Fund and Rome have intensified as concern has grown about a financial backstop for Italy, should the country need it.

Euro zone finance ministers are due on Tuesday to consider detailed operation rules for the area's bailout fund. Approvals will clear the way for the 440 billion euro ($583.83 billion)fund to attract cash aimed at boosting the fund's resources.

Moody's 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, Moody's noted, reflecting political uncertainties in Greece and Italy and a worsening of the region's economic outlook, among other factors.

"The probability of multiple defaults by euro area countries is no longer negligible. In Moody's 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.

"Moody's 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 stabilize credit market conditions, or markets stabilizing for any other reason, "the point is likely to be reached where the overall architecture of Moody's ratings within the euro area, and possibly elsewhere, within the EU, will need to be revisited."

($1 = 0.7536 euros)

(Reporting by Ian Chua; Writing by Neil Fullick; Editing by Ian Geoghegan)

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Comments (6)
So if they down grade each country on the planet who is left to really care…The whole world has shoddy credit,is it really going to matter these Moody people just keep wandering around and spouting off about downgrading “countries’ credit ratings” and after your agency has downgraded a fair percentage of the planet that leaves what Moody’s can do business with China because they are the only country that seems to have any money to spend

Nov 28, 2011 12:29am EST  --  Report as abuse
neahkahnie wrote:
Like poor people who pay higher interest rates to get out of debt and go further in debt because of the high interest rates that they can’t pay, the European nations seem to be in the same fix. As the interest rates go up and the rating companies are so negative to bond investors, there is almost a self-fulfilling prophecy to a downward spiral and recession/depression. The banks and the rating agencies have us all by the you know whats.

Nov 28, 2011 12:40am EST  --  Report as abuse
Greenspan2 wrote:
Europe will strengthen its internal ties and banking system, eventually allowing it to give Moody’s and US rating agencies the finger. The US has lost credibility and is gradually but surely losing international influence, which is for the better.

Nov 28, 2011 12:44am EST  --  Report as abuse
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