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Portfolio > Economy & Markets

Eurozone Teetering on Break Up: Banks, Ratings Agencies

By Marlene Y. Satter

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All of Europe’s credit ratings could be in danger from the escalating debt crisis, Moody’s Investors Service said on Monday, and both banks and ratings agencies said that the eurozone itself is in danger of breaking up.

European Central Bank headquarters (Photo: AP)Saying that the political will to act will likely not emerge until after a series of disasters strikes, Moody’s said in a Reuters report that the result was likely to be a loss of market funding for eurozone countries and the need for a support program. Meanwhile, Bloomberg reported that both banks and ratings agencies were envisioning a breakup of the euro area, along with all the downsides that would entail.

Not just investors but institutions are growing far more wary of the debt crisis escalation since a bond auction by Germany met with low demand and higher yields. The possibility that the stalwart German economy may be in danger from the spreading contagion has drawn banks to comment that the end of the eurozone may be near. Deutsche Bank was quoted saying that the eurozone has entered “a new stage of the crisis” and Nomura said that a “far more dangerous phase” is beginning.

Pier Carlo Padoan, the chief economist at the Paris-based Organization for Economic Cooperation and Development, cut forecasts for European and global growth Monday, and was quoted saying, “Skepticism has grown that euro-area policy makers can deal effectively with the key challenges they face.” Economists from Morgan Stanley, UBS and Nomura International are saying that governments and the European Central Bank need to take more immediate and decisive action to respond to the crisis.

In a report, Moody’s said, “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.”

Should nations fail to act until crisis escalations occur, the agency continued, “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.”

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