Europe Will Soon Be Burning Like Greece

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PostTue Feb 14, 2012 9:06 pm » by Savwafair2012


Rating Action:
Moody's adjusts ratings of 9 European sovereigns to capture downside risks



London, 13 February 2012 -- As anticipated in November 2011, Moody's Investors Service has today adjusted the sovereign debt ratings of selected EU countries in order to reflect their susceptibility to the growing financial and macroeconomic risks emanating from the euro area crisis and how these risks exacerbate the affected countries' own specific challenges.


Moody's actions can be summarised as follows:

- Austria: outlook on Aaa rating changed to negative

- France: outlook on Aaa rating changed to negative

- Italy: downgraded to A3 from A2, negative outlook

- Malta: downgraded to A3 from A2, negative outlook

- Portugal: downgraded to Ba3 from Ba2, negative outlook

- Slovakia: downgraded to A2 from A1, negative outlook

- Slovenia: downgraded to A2 from A1, negative outlook

- Spain: downgraded to A3 from A1, negative outlook

- United Kingdom: outlook on Aaa rating changed to negative




Please see the individual country specific statements below for more detailed information relating to the rating rationale and the sensitivity analysis for each affected sovereign issuer.



The implications of these actions for directly and indirectly related ratings will be reported through separate press releases.



The main drivers of today's actions are:



- The uncertainty over (i) the euro area's prospects for institutional reform of its fiscal and economic framework and (ii) the resources that will be made available to deal with the crisis.

- Europe's increasingly weak macroeconomic prospects, which threaten the implementation of domestic austerity programmes and the structural reforms that are needed to promote competitiveness.

- The impact that Moody's believes these factors will continue to have on market confidence, which is likely to remain fragile, with a high potential for further shocks to funding conditions for stressed sovereigns and banks.



To a varying degree, these factors are constraining the creditworthiness of all European sovereigns and exacerbating the susceptibility of a number of sovereigns to particular financial and macroeconomic exposures.



Moody's has reflected these constraints and exposures in its decision to downgrade the government bond ratings of Italy, Malta, Portugal, Slovakia, Slovenia and Spain as listed above. The outlook on the ratings of these countries remains negative given the continuing uncertainty over financing conditions over the next few quarters and its corresponding impact on creditworthiness.



In addition, these constraints have also prompted Moody's to change to negative the outlooks on the Aaa ratings of Austria, France and the United Kingdom. The negative outlooks reflect the presence of a number of specific credit pressures that would exacerbate the susceptibility of these sovereigns' balance sheets, and of their ongoing austerity programmes, to any further deterioration in European economic conditions and financial landscape.



An important factor limiting the magnitude of Moody's rating adjustments is the European authorities' commitment to preserving the monetary union and implementing whatever reforms are needed to restore market confidence. These rating actions therefore take into account the steps taken by euro area policymakers in agreeing to a framework to improve fiscal planning and control and measures adopted to stem the risk of contagion.



The rating agency considers the ratings of the following European sovereigns to be appropriately positioned, namely Denmark (Aaa), Finland (Aaa), Germany (Aaa), Luxembourg (Aaa), Netherlands (Aaa), Sweden (Aaa), Belgium (Aa3), Estonia (A1) and Ireland (Ba1). Moody's review of Cyprus' Baa3 rating, as announced in November 2011, is ongoing, while the developing outlook on Greece's Ca rating remains appropriate as the rating agency awaits clarification on the country's debt restructuring.



As for Central and Eastern European sovereigns outside the euro area, Moody's will be assessing the credit implications of the fragile financial market conditions and weak macroeconomic outlook during the first half of this year.



In related rating actions, Moody's has today also downgraded the rating of Malta Freeport Co. to A3 from A2, and that of Spain's Fondo de Reestructuración Ordenada Bancaria (FROB) to A3 from A1. Both of these issuers are government-guaranteed entities and therefore have a negative outlook in line with the outlook on their respective sovereign. Moody's has today also changed the outlook on the Aaa debt rating of the Bank of England to negative, in parallel with its decision to change the outlook on the UK's sovereign rating. Similarly, Moody's has changed to negative the outlook on the Aaa debt ratings of the Société de Financement de l'Economie Française (SFEF) and the Société de Prise de Participation de l'Etat (SPPE) in line with the change of outlook on France's sovereign rating.



The principal methodology used in these ratings was Sovereign Bond Ratings Methodology published in September 2008. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.





Moody's changes the outlook on Austria's Aaa rating to negative



Moody's Investors Service has today changed the outlook on the Aaa rating of the Republic of Austria to negative from stable. Concurrently, Moody's has affirmed Austria's short-term debt rating of Prime-1.

The key drivers of today's action on Austria are:

1.) The uncertainty over the prospects for institutional reform in the euro area and the weak macroeconomic outlook across the region, which will continue to weigh on already fragile market confidence.

2.) The balance sheet of the Austrian government is exposed to larger contingent liabilities than is the case for other Aaa-rated sovereigns in the EU, mainly on account of the relatively large size of Austria's banking sector, its substantial exposure to the more volatile economies in Central and Eastern Europe and the reliance of the banks on wholesale funding markets. The stand-alone credit strength of the Austrian banking sector is low for a Aaa-rated sovereign.

3.) While the concerns over the banking sector are not new, Austria's debt metrics are weaker today than they were in 2008-2009, the last time that the Austrian government provided support to its banks. The Austrian government's debt metrics are also weaker than some of those of other Aaa-rated peers.



RATIONALE FOR NEGATIVE OUTLOOK



As indicated in the introduction of this press release, a contributing factor underlying Moody's decision to change the outlook on Austria's Aaa bond rating to negative is the uncertainty over the euro area's prospects for institutional reform of its fiscal and economic framework and over the resources that will be made available to deal with the crisis. Moreover, Europe's weak macroeconomic prospects complicate the implementation of domestic austerity programmes and the structural reforms that are needed to promote competitiveness. Moody's believes that these factors will continue to weigh on market confidence, which is likely to remain fragile, with a high potential for further shocks to funding conditions for stressed sovereigns and banks.



While constraining the creditworthiness of all European sovereigns, the fragile financial environment increases Austria's susceptibility to financial shocks. Moody's decision to change the outlook to negative reflects the large contingent liabilities to which the Austrian sovereign is exposed, given the relatively large size of its banking sector and in particular its exposure to the Central, Eastern and South-Eastern European (CESEE) region. According to the Austrian banking regulator FMA, total consolidated assets of Austria's banks amounted to 390% of Austria's GDP in Q3 2011 and their exposure to the CESEE region remains elevated at EUR225 billion, or 75% of GDP, as of September 2011 (see OeNB Financial Stability Report, December 2011). Moody's notes that the stand-alone credit strength of the Austrian banking sector is low compared with the banking sectors of other Aaa-rated sovereigns.



The decision to assign a negative outlook mainly reflects Moody's lower "tolerance" for high levels of contingent liabilities at the very high end of the rating spectrum, rather than concerns over a further increase in the government's potential exposure. Austrian banks' capitalisation levels are lower than they are in other Aaa-rated countries, and their business models continue to exhibit higher risks than those of banks in most of Austria's peers. This was acknowledged by Austria's central bank in its latest Financial Stability Report (published in December 2011).



Moody's acknowledges the active attempts by the Austrian banking regulator to reduce the country's exposure by requiring the Austrian banks that operate in the region to reduce the funding mismatch that is prevalent in some of the countries. However, we believe that this reduction will most likely happen only gradually over the next few years. In the meantime, a potential further downturn in the CESEE region (for example, from contagion from a further deterioration of economic and financial conditions in the euro area) could generate considerably higher capital and funding support needs, which Moody's would deem to be incompatible with the Austrian government maintaining its Aaa rating.



The third factor underpinning the outlook change is Austria's weakened public debt metrics compared with some of the other Aaa-rated peers. Austria's debt metrics are not as strong as they were in 2008/09, the last time that the Austrian government provided support to its banks. Austria's public debt ratio stood at around 75% of GDP in 2011, which is significantly above the median debt ratio for all Aaa-rated sovereigns of around 52% of GDP. This estimate includes the full debt of the government-related issuer OeBB Infrastruktur (EUR17 billion as of end-2011). Even under base case assumptions, Moody's expects Austria's debt ratio to rise to around 80% of GDP in 2013, an increase of 20 percentage points compared to 2007, and to decline only gradually thereafter.



The upward trajectory of Austria's outstanding debt places it amongst the most heavily indebted of its Aaa-rated peers, alongside the United States, France and the United Kingdom whose Aaa ratings also carry a negative outlook.



RATIONALE FOR UNCHANGED Aaa RATING



Austria's Aaa rating is supported by the country's strong, diversified economy with no major private sector or external imbalances to correct. Growth performance has been strong by comparison with other European economies, unemployment is low, the current account has been in surplus since 2002 and the leverage of the private sector is moderate. Austria has a good track record of achieving and maintaining low budget deficits, recording a budgetary shortfall of above 2.5% of GDP only once in the period of 1997 to 2009. The deficit outturn in 2011 was better than budgeted, with a deficit of 3.3% of GDP (versus an expected 3.9% budget shortfall) due to much stronger revenue growth and very strict monitoring of spending. This compares favourably with the budgetary performance of some of the other Aaa-rated peers. However, given the expected slowdown in growth across the euro area in 2012, Moody's is not expecting the Austrian government to make any material progress in reducing the fiscal deficit, which will in turn keep the debt ratio on an upward trajectory. Moody's acknowledges the government's recently presented fiscal consolidation package which aims to bring the budget deficit to zero by 2016. While the accelerated fiscal consolidation is welcome, Moody's notes that Austria's debt ratio will remain above 70% of GDP in 2016, even assuming full implementation of all the proposed measures.



WHAT COULD MOVE THE RATING DOWN



The Austrian government's bond rating could potentially be downgraded to Aa1 if further material government support were needed to support the country's banking sector. A sharp intensification of the euro area crisis and further deterioration of macroeconomic conditions in Europe, leading to material fiscal and debt slippage in Austria, could also pressure the rating.

Conversely, the outlook on the sovereign Aaa rating could be returned to stable if government contingent liabilities were materially reduced, for example, by a further significant strengthening of the banking sector's capital base through private sector capital or organic capital growth, so as to remove any doubt about the need for future public sector support.





Moody's changes the outlook on France's Aaa rating to negative



Moody's Investors Service has today changed the outlook on the Aaa rating of France's local- and foreign-currency government debt to negative from stable.

The key drivers of today's outlook change on France are:

1.) The uncertainty over the prospects for institutional reform in the euro area and the weak macroeconomic outlook across the region, which will continue to weigh on already fragile market confidence.

2.) The ongoing deterioration in France's government debt metrics, which are now among the weakest of France's Aaa-rated peers.

3.) The significant risks to the French government's ability to achieve its fiscal consolidation targets, which could be further complicated by a need to support other European sovereigns or its own banking system.

Concurrently, Moody's has today also changed to negative the outlook on the Aaa debt ratings of the Société de Financement de l'Economie Française (SFEF) and the Société de Prise de Participation de l'Etat (SPPE) in line with the change of outlook on France's sovereign rating.



RATIONALE FOR NEGATIVE OUTLOOK



As indicated in the introduction of this press release, a contributing factor underlying Moody's decision to change the outlook on France's Aaa government bond rating to negative is the uncertainty over the euro area's prospects for institutional reform of its fiscal and economic framework and over the resources that will be made available to deal with the crisis. Moreover, Europe's weak macroeconomic prospects complicate the implementation of domestic austerity programmes and the structural reforms that are needed to promote competitiveness. Moody's believes that these factors will continue to weigh on market confidence, which is likely to remain fragile, with a high potential for further shocks to funding conditions. In addition to constraining the creditworthiness of all European sovereigns, the fragile financial environment increases France's susceptibility to financial and macroeconomic shocks given the concerns identified below.

The second driver underpinning the negative outlook is the ongoing deterioration in France's government debt metrics, which are now among the weakest of France's Aaa peers. France's primary balance is in deficit and compares unfavourably with other Aaa-rated countries with a stable outlook. The upward trajectory of France's outstanding debt over the decade preceding the crisis, at a time when most other governments were reducing their debt ratios, places it amongst the most heavily indebted of its Aaa-rated peers, alongside the United States and the United Kingdom whose Aaa ratings also carry a negative outlook. France's capacity to support higher government debt levels is also complicated by the limitations of operating without the advantage of being the single "risk-free" issuer of debt denominated in its currency.



The third driver of today's announced action is the significant risk attached to the government's medium-term ability to implement consolidation targets and achieve a stabilisation and reversal in its public debt trajectory. While the rating agency acknowledges the French government's efforts to implement important economic and fiscal reforms since 2008, and meet fiscal targets over the past two years, the agency notes that France's prior reluctance to decisively reform and consolidate have left its finances in a challenging position amid an ongoing global financial and euro area debt crisis. Stabilising, and ultimately reducing, France's stock of outstanding debt will be contingent on the French government maintaining its fiscal consolidation effort. Meanwhile, the fragile financial market environment, which will endure for many months to come, constrains the French government's room to manoeuvre in terms of stretching its balance sheet in the face of further direct challenges to its finances -- for example, from the possible need to provide support to other European sovereigns or to its own banking system, both of which would further complicate its own fiscal consolidation process.



RATIONALE FOR UNCHANGED Aaa RATING



France's Aaa rating is supported by the economy's large size, high productivity and broad diversification, together with high private sector savings and relatively moderate household and corporate liabilities. This provides considerable capacity to absorb shocks, as demonstrated by the resilience of domestic demand during the 2008-2009 global crisis. The ability of the French government to finance its very high debt level at affordable interest rates in an uncertain financial and economic environment will be crucial to it retaining its Aaa rating.



WHAT COULD MOVE THE RATING DOWN



Moody's would downgrade France's government debt rating in the event of an unsuccessful implementation of economic and fiscal policy measures, leading to failure of the government's attempt to stabilise and reverse the high public debt ratio, generating a further weakening of the debt metrics against peers and further reducing France's resiliency to potential economic and financial shocks. A material increase in exposure to contingent liabilities from the national banking system or a requirement for further support to neighbouring euro area member states if the euro area crisis were to intensify could also prompt a rating downgrade.

A return to a stable outlook on France's sovereign rating would require significant progress towards improving the debt metrics and an easing of the euro area sovereign crisis given Moody's concerns regarding the country's exposure to contingent liabilities.





Moody's downgrades Italy's government bond rating to A3 from A2, negative outlook



Moody's Investors Service has today downgraded the Italian government's local- and foreign-currency debt rating to A3 from A2. The outlook remains negative. Concurrently, Moody's has downgraded the country's short-term rating to Prime-2 from Prime-1.

The key drivers of today's rating action on Italy are:

1.) The uncertainty over the prospects for institutional reform in the euro area and the weak macroeconomic outlook across the region, which will continue to weigh on already fragile market confidence.

2.) The challenges facing Italy's public finances, especially its large stock of debt and high cost of funding, as well as the country's deteriorating macroeconomic outlook.

3.) The significant risk that Italy's government may not achieve its consolidation targets and address its public debt given the country's pronounced structural economic weakness.

Moody's is maintaining a negative outlook on Italy's sovereign rating to reflect the potential for a further decline in economic and financing conditions as a result of a deterioration in the euro area debt crisis.



RATIONALE FOR DOWNGRADE



As indicated in the introduction of this press release, a contributing factor underlying Moody's one-notch downgrade of Italy's government bond rating is the uncertainty over the euro area's prospects for institutional reform of its fiscal and economic framework and over the resources that will be made available to deal with the crisis. Moreover, Europe's weak macroeconomic prospects complicate the implementation of domestic austerity programmes and the structural reforms that are needed to promote competitiveness. Moody's believes that these factors will continue to weigh on market confidence, which is likely to remain fragile, with a high potential for further shocks to funding conditions. In addition to constraining the creditworthiness of all European sovereigns, the fragile financial environment increases Italy's susceptibility to financial and macroeconomic shocks given the concerns identified below.



The deteriorating macroeconomic environment is in turn exacerbating a number of Italy's own challenges that are weighing on its creditworthiness and constitute the second driver of Moody's one-notch downgrade of Italy's bond rating. The multiple structural measures introduced by the government to promote economic growth will take time to yield results, which are difficult to predict at this stage. Moreover, the recent volatility in funding conditions for the Italian sovereign remains a risk factor that needs to be reflected in the government bond rating. Overall, the combination of a large debt stock (equivalent to 120% of GDP) and low medium-term economic growth prospects makes Italy susceptible to volatility in market sentiment that results in increased debt-servicing costs.



The third driver of today's rating action is the significant risk that the Italian government may not achieve its consolidation targets and prove unable to reduce the large stock of outstanding public debt. Moody's acknowledges that the new Italian government's fiscal consolidation and economic reform efforts have helped to maintain a primary surplus. The government has targeted primary surpluses in excess of 5% in the coming years. However, in an environment of pronounced regional economic weakness, the Italian government faces considerable challenges in generating the high primary surpluses required to compensate for higher interest payments and ultimately reduce its outstanding public debt.

These credit pressures have intensified and become more apparent in the period since Moody's last rating action on Italy in September 2011, and are contributing to the need to reposition Italy's rating at the lower end of the 'A' range.

The decision to downgrade Italy's debt rating also reflects Moody's view that Italy's credit fundamentals and vulnerabilities due to its high debt burden are difficult to reconcile with a rating above the lower end of the "single-A" rating category. Indeed, peers at the top of the single-A category (like the Czech Republic and South Korea) as well as those in the middle of the category (like Poland), do not face Italy's high debt and structural growth challenges.
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PostTue Feb 14, 2012 10:25 pm » by Svaha


Moody's and for instance S&P are extensions of the US, if this wasn't true the US had long lost it's triple A status.
The outcome of this could very well be that Europe turns to China / Russia.
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PostWed Feb 15, 2012 12:01 am » by Flecktarn


takes peoples minds off whats relay going on ,just prepare some supplies for whats ahead
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