Investments  

Moody’s to revisit ratings of EU in Q1 2012

Moody’s Investors Services still plans to revisit the ratings of all EU sovereigns during the first quarter of 2012 due to the “continued absence of decisive policy measures”.

The ratings agency had stated in November that this was due to the absence of measures to stabilise credit markets over the short term. This 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.

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However, the ratings agency believes that the announcement offers few new measures and pointed out that many are similar to those previously announced.

According to Moody’s, the measures to strengthen oversight of excessive deficits were first announced in the first half of 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.

It said in a statement: “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.”

As a result, Moody’s is set to revisit sovereign ratings of euro area and EU countries during the first quarter of 2012. Last week, Standard & Poor’s announced that it was considering downgrading the debt of 15 of the 17 eurozone countries.

Ilya Spivak, currency strategist at FXCM, claimed that European shares are “sinking” amid disappointment following last week’s EU leaders’ summit as traders “come to terms with the reality that the sit-down met almost none of the lofty expectations built up across financial markets”.

He said: “Pessimism is punctuated by a pledge from ratings giant Moody’s to review the credit ratings of all European Union countries in the first quarter of next year after the EU summit failed to produce “decisive policy measures”.

“S&P 500 stock index futures are pointing sharply lower, hinting more of the same is on tap as North America comes online.”