Moody’s, S&P to review ratings across Europe
Moody’s Investors Services will review its ratings on all European Union sovereign credit in the first quarter of next year. Last week’s agreement by European policymakers failed to persuade Moody’s that the agreed measures would resolve the region’s debt crisis.
The markets also were not impressed. An initial rally soon faded, as stocks slipped, the euro was down and borrowing costs of Italy and Spain returned to their upward trend, despite some limited bond purchases by the ECB.
Italian 5-year bond yields were soon back above 7%, while Italian 10-year yields spiked above 6.8% and Spanish 10-year yields topped 6%. Next year, Italy must roll over €340bn of maturing debt, a process that will start with the first auction of the year in mid-January.
Standard & Poor’s has put 14 Eurozone governments on credit watch for possible downgrade in the next few weeks. If France were to lose its fragile-looking AAA-rating, the eurozone rescue fund would be also be put at risk.
Twenty-six of the 27 European Union leaders last Friday agreed to pursue stricter budget rules for the single currency area and also to have euro zone states and others provide up to €200 billion in bilateral loans to the IMF to help tackle the crisis.
“In substance, however, the communiqué offers few new measures, and does not change our view that risks to the cohesion of the euro area continue to rise,” Moody’s said in its weekly credit report.
“As we announced in November, unless credit market conditions stabilise in the near future, our ratings of all EU sovereigns will need to be revisited. The communiqué does not change that view, and we continue to expect to complete such a repositioning during the first quarter of 2012,” Moody’s said in a note.
The communiqué reflects the continuing tension between euro area leaders’ recognition of the need to increase support for fiscally weaker countries and the significant opposition within stronger countries to doing so, Moody’s noted.
As pressure mounts on euro area authorities to act quickly to restore credit market confidence, the constraints they face are also rising. “The longer that remains the case, the greater the risk of adverse economic conditions that would add to the already sizeable challenges facing the authorities’ coordination and debt reduction efforts.”