Full Text: Moody’s: Euro Area Sovereigns Remain Under Pressure In Absence of Decisive Initiatives

Below is the press release issued by ratings agency Moody’s in response to the most recent initiative in Europe to solve the sovereign debt crisis.

London, 12 December 2011 — In view of the continued absence of decisive policy measures despite the recent euro area summit, Moody’s Investors Service is reiterating its intention to revisit the ratings of all EU sovereigns during the first quarter of 2012. As Moody’s had stated in November, this is because the absence of measures to stabilise credit markets over the short term means that the euro area, and the wider EU, remain prone to further shocks and the cohesion of the euro area under continued threat.

Last Friday, European policymakers announced additional measures aimed at addressing the formidable challenges facing the euro area. Moody’s acknowledges that the announcement underlines the continued desire among euro area politicians to move towards centralised fiscal coordination and mutualisation of resources and risks. However, Moody’s believes that the announcement offers few new measures and points out that many are similar to previously announced ones. (Measures to strengthen oversight of excessive deficits were first announced in H1 2011, while the intention to strengthen national budgetary frameworks and improve coordination and cooperation was announced in October, as was the aim of leveraging the EFSF.)

Overall, Moody’s believes that the announced measures reflect 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. Amid growing pressures on euro area authorities to act quickly to restore credit market confidence, the constraints they face are also rising. The longer this 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.

The announced measures therefore do not change Moody’s previously expressed view that the crisis is in a critical and volatile stage, with sovereign and bank debt markets prone to acute dislocation which policymakers will find increasingly hard to contain. While Moody’s central scenario remains that the euro area will be preserved without further widespread defaults, the shocks that are likely to materialise even under this ‘positive’ scenario carry negative rating implications in the coming months. Moreover, the longer the incremental approach to policy persists, the greater the likelihood of more severe scenarios, including those involving multiple defaults by euro area countries and those additionally involving exits from the euro area.

The credit implications of these and further measures likely to be announced in coming weeks require careful consideration against the backdrop of decelerating regional economic activity, fragile banking systems, partly dysfunctional credit markets, and the varying degree of success of country-specific measures aimed at structural change and fiscal consolidation. But in the absence of policy initiatives in the near future that stabilise credit market conditions effectively, Moody’s believes that the system remains prone to further shocks, which would likely lead to selective rating changes. As a result, Moody’s intention remains to revisit sovereign ratings of euro area and EU countries during the first quarter of 2012.