March 31, 2011

Euro Zone Downgrades Not Over Yet: Moody’s

Further ratings cuts to come because of troubled countries’ inadequate measures

Moody’s Investors Service said Thursday that downgrades to troubled nations in the euro zone were not over, thanks to inadequate measures to resolve the ongoing debt crisis that were announced last week by the European Union (EU).

Reuters reported that Moody’s was critical of the steps taken by the EU, although it conceded that those provisions did confirm policymakers’ commitment to helping weaker nations survive their liquidity problems. However, the fact that those countries had uncertain solvency profiles was dominant.

Moody’s said in a statement, "Given these developments, our sovereign ratings in the euro area will be driven by three assumptions that were confirmed by Friday's announcements: the lack of solvency support, the distinct possibility of debt restructurings and other forms of sovereign default, and our expectation of a continued difficult funding environment."

Without a fiscal transfer mechanism and conditions that would make help available, private creditors were left open to the possibility of downside risk, the company added, and said that the support framework that was made public last week was dependent on political consensus that was none too stable and that has been unpredictable.

"As a result,” Moody’s said, “we expect funding stress to continue for many EU sovereigns. If the cost of borrowing continues to rise and medium-term projected debt affordability metrics decline, further downward rating actions may be warranted."

The company continues, it said, to hold negative outlooks on Greece, Ireland, Portugal and Spain, all of which it downgraded earlier in the month. Moody’s added that the provisions announced regarding the EU’s European Financial Stability Facility (EFSF)/European Stability Mechanism (ESM) did not meaningfully increase those devices’ flexibility. While the EFSF/ESM can buy member nations’ bonds in their primary debt markets, the facilities cannot do so through bond buybacks or on the secondary market.

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