NOTE: On June 29, 2012 the press release was revised as follows: Corrected two sources of information disclosures under Regulatory Disclosures Section.
Information sources used to prepare the ratings for Government of United Kingdom and Bank of England are the following: parties
involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service
information, and confidential and proprietary Moody's Analytics information.
changed to:
Information sources used to prepare the ratings for Government of United Kingdom and Bank of England are the following: parties
involved in the ratings, parties not involved in the ratings, public information.
Added Austria to the fourth sources of information disclosure so that the disclosure now appears as:
Information sources used to prepare the ratings for Governments of Spain and Austria are the following: parties involved in the ratings,
parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information. Revised release follows.
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 October 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.
WHAT COULD MOVE THE RATING UP/DOWN
Italy's government debt rating could be downgraded further in the
event of evidence of persistent economic weakness, reform implementation
difficulties, or increased political uncertainty, which translate
into a significant postponement of Italy's fiscal consolidation
and reversal of the public debt trajectory. A substantial and ongoing
deterioration of medium-term funding conditions for Italy due to
further substantial domestic economic and financial shocks from the euro
area crisis would also be credit-negative. Moreover,
Italy's sovereign rating could transition to substantially lower
rating levels if the country's access to the public debt markets
were to be constrained and the long-term availability of external
sources of liquidity support were to remain uncertain.
Conversely, a successful implementation of economic reform and fiscal
measures that effectively strengthen the Italian economy's growth
pattern and the government's balance sheet would be credit-positive
and could stabilise the outlook. Upward pressure on Italy's
rating could develop if the government's public finances were to
become less vulnerable to volatile funding conditions, further to
a reversal of the upward trajectory in public debt and, ultimately,
the achievement of substantially lower debt levels.
Moody's downgrades Malta's government bond rating to A3 from
A2, negative outlook
Moody's Investors Service has today downgraded Malta's government
bond rating to A3 from A2. The outlook remains negative.
The key drivers of today's rating action on Malta 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.) Malta's relatively weak debt metrics compared with 'A'
category peers and the country's reliance on the strength of the
European economy, which will dampen its own growth prospects in
the medium term and worsen its debt dynamics.
Moody's is maintaining a negative outlook on Malta'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.
In a related rating action, Moody's has today also downgraded the
foreign- and local-currency debt ratings of Malta Freeport
Co. to A3 from A2 given its status as a government-guaranteed
entity. The outlook remains negative in line with the sovereign
rating.
RATIONALE FOR DOWNGRADE
As indicated in the introduction of this press release, a contributing
factor underlying Moody's one-notch downgrade of Malta'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
Malta's susceptibility to financial and macroeconomic shocks given
the concerns identified below.
The fragile external environment is exacerbating a number of Malta's
own challenges which continue to weigh negatively on the country's
debt rating and constitute the second driver of Moody's downgrade.
Malta's debt metrics are among the weaker of the 'A'-rated
sovereigns. Growth prospects over the medium term also appear poorer
for Malta than for its peers, given the country's dependence
on tourism from the euro area as its main source of economic growth.
This will hinder the narrowing of the fiscal imbalance. Lower business
confidence and tighter credit conditions are likely to result in weak
private-sector investment, and real output growth is likely
to be significantly lower than the government's forecast of over
2%. The deteriorating growth prospects and the concomitant
impact on already weak debt dynamics will further reduce government financial
strength and expose it to more constrained, higher-cost funding
conditions.
WHAT COULD MOVE THE RATING UP/DOWN
Downward pressure on the rating could develop if Malta's economic
growth prospects deteriorate significantly, thereby obstructing
fiscal consolidation and leading to a significant further deterioration
in the sovereign's key credit metrics. The rating could also
be downgraded if an intensification of the euro area crisis were to result
in materially higher cost or constrained funding conditions for the government.
A further deterioration of macroeconomic conditions in Europe, leading
to material fiscal and debt slippage in Malta, could also pressure
the rating.
Conversely, the negative outlook on Malta's sovereign rating
would be changed to stable in the event of a sustained improvement in
investor sentiment across the euro area. Although unlikely in the
foreseeable future, the government's ratings could move upward
in the event of a significant improvement in the government's balance
sheet, leading to greater convergence with 'A' category
medians. Substantial structural reforms focused on enhancing competitiveness
and boosting potential output growth rates would also be credit-positive.
Moody's downgrades Portugal's government bond rating to Ba3
from Ba2, negative outlook
Moody's Investors Service has today downgraded the government of
Portugal's long-term debt ratings to Ba3 from Ba2.
The outlook remains negative.
The key drivers of today's rating action on Portugal 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 resulting potential for a deeper and longer economic contraction
in Portugal than previously anticipated, and the ongoing deleveraging
process in the country's economy and banking system.
3.) The higher-than-expected general government debt
ratios, which are due to reach roughly 115% of GDP within
the next two years, thereby significantly limiting the room for
fiscal manoeuvre and commensurately reducing the likelihood of achieving
a declining debt trajectory.
4.) Potential contagion emanating from the impending Greek default,
which is likely to extend the period during which Portugal is unable to
access long-term private markets once the current support programme
expires.
Moody's is maintaining a negative outlook on Portugal'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 Portugal'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. This will in turn mean a high
potential for further shocks to funding conditions, which will affect
weaker sovereigns like Portugal first, increasing its susceptibility
to other financial and macroeconomic shocks given the concerns identified
below.
This backdrop is exacerbating Portugal's domestic challenges and
informs the second driver of Moody's rating action, which
is the weakening outlook for the country's economic growth prospects
and the implications for the government's efforts to place its debt
on a sustainable footing. Moody's expects the Portuguese
economy to contract by more than 3% in 2012 given the multitude
of downside risks from the region, including the impact of the ongoing
deleveraging in the financial and private sector as well as the immediate
impact of the government's austerity measures. The unemployment
rate is likely to remain high and nominal wages will remain under pressure
due to cutbacks in public-sector bonuses and staff levels,
thus depressing domestic demand. Moreover, Moody's
expectation of a slowdown among Portugal's main trading partners
in 2012 will undermine the contribution from net exports, the only
driver of GDP growth since the 2009 recession. Lastly, the
macroeconomic impact of the targeted fiscal tightening in 2012 is programmed
to be as intense as that of 2011, further subduing domestic growth
prospects.
The third driver for the downgrade of Portugal's sovereign rating
is the unfavourable revision of the forecast for government debt metrics,
which are now projected to rise to around 115% of GDP or higher
before stabilising. This greater-than-anticipated
level is a consequence of the government's assumption of debt from
state-owned enterprises and regional governments in 2008,
2009 and 2010, as well as the expectation that the government will
need to draw the EUR12 billion bank recapitalisation package that is part
of the IMF/EU program. At these levels, the government has
very little room to manoeuvre in the event of further economic,
financial or political shocks originating from either domestic or external
sources. Moreover, in a low-growth environment,
higher initial debt levels will further complicate the government's
deleveraging efforts, especially since debt affordability (i.e.
the cost of servicing the debt as a share of government revenues) is likely
to remain more onerous than previously estimated.
The fourth driver of today's rating action is Moody's view
that the increasing likelihood of a disorderly default by Greece (if it
fails to gain the required level of support of investors for the proposed
restructuring terms, or further financial assistance from official-sector
supporters) will very likely make Portugal unable to access long-term
market funding in September 2013 as planned, and increase pressure
on the government to seek a debt restructuring. Moody's believes
that there is a high risk of contagion from Greece among weaker euro area
sovereigns in particular. While unfavourable market perceptions
will not affect Portugal's access to long-term official-sector
funding under its International Monetary Fund/European Union support programme
until at least 2014, and probably beyond, Moody's notes
that access to official-sector funding is not a guarantee of support
from private-sector creditors. Moreover, the longer
official-sector support is needed, the greater the pressure
for a restructuring of Portugal's private-sector debt becomes.
While risks remain weighted to the downside, there are several reasons
why Moody's downgrade of Portugal's government debt rating
is limited to one notch. The first is the government's success
in exceeding fiscal targets, as set out in its IMF/EU-supported
economic adjustment programme. This was possible despite the initial
significant divergence in the government deficit from these targets in
the first half of 2011, additional setbacks such as assuming the
debt and debt-servicing obligations of some state-owned
enterprises under recent EU accounting rules, as well as EUR1.1
billion in previously unreported debt stemming from the autonomous region
of Madeira. These setbacks were partly overcome with the help of
the one-off transfer of pension assets worth 3.5%
of GDP from the big four commercial banks to the central government,
which facilitated a total reduction in Portugal's nominal general
government deficit by nearly 6% of GDP in 2011.
The second reason for the limited rating adjustment is Moody's expectation
that the Portuguese government will have achieved a structural budget
correction in 2011 equivalent to around 4% of GDP, which
the IMF estimates to be the largest such adjustment in Europe in 2011.
A third reason is that, in 2011, the Portuguese government
also began to design and implement a set of further structural reforms
intended to bolster the economy's potential growth rate.
The Portuguese government, unlike that of Greece, has managed
to secure the cooperation of a large segment of the labour force for these
reforms.
WHAT COULD MOVE THE RATING UP/DOWN
The rating could be further downgraded if the government's deficits
are not kept sufficiently low to place the debt ratios on a clear downward
path within the next three years, or if the government fails to
meet its fiscal targets or fails to implement its planned structural reforms.
An intensification of the euro area crisis and further deterioration of
macroeconomic and financial market conditions in Europe, leading
to material fiscal and debt slippage in Portugal, could also pressure
the country's rating.
Although positive rating pressure is not likely over the near to medium
term, Moody's considers that the outlook on Portugal's
debt rating could stabilise if the government were to pursue macroeconomic
policies that place its debt on a sustainable downward trajectory and
buoys the economy's growth potential. The credit would also
benefit from continued compliance with the IMF/EU programme and ongoing
enactment of the promised structural reforms, which would improve
market confidence and increase the likelihood that the Portuguese government
will regain access to the private long-term debt market.
Moody's downgrades Slovakia's government bond rating to A2
from A1, negative outlook
Moody's Investors Service has today downgraded Slovakia's
government bond ratings to A2 from A1. The outlook has been changed
to negative.
The key drivers of today's rating action on Slovakia 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.) Slovakia's increased susceptibility to financial and
political event risk, presenting considerable challenges to achieving
the government's fiscal consolidation targets and reversing the
adverse trend in debt dynamics.
3.) The increased downside risks to economic growth due to weakening
external demand.
Moody's has changed the outlook on Slovakia's sovereign rating
to negative 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 Slovakia'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
Slovakia's susceptibility to financial and macroeconomic shocks
given the concerns identified below.
The fragile external environment is directly increasing Slovakia's
susceptibility to financial event risk, which is the second driver
informing the one-notch downgrade of the country's government
bond rating. Specifically, the volatile market conditions
are increasing Slovakia's financing costs and its growing funding
risks. At the same time, political event risk has also been
heightened by the recent collapse of the government led by Prime Minister
Iveta Radicova following a confidence vote in October 2011. Increased
susceptibility to financial and political event risk present considerable
challenges to achieving the government's fiscal consolidation targets
and reversing the recent adverse trend in debt dynamics. Slovakia's
general government debt-to-GDP ratio has climbed from 28%
in 2008 to over 44% in 2011, and will not stabilise in 2012-13
as had been initially expected.
The third factor underlying the downgrade is Slovakia's exposure
to the deteriorating regional macroeconomic environment given the dependence
of the economy on external demand, a key channel for contagion from
the euro area crisis. Subdued activity in the euro area will continue
to negatively affect the export-driven Slovak economy, constraining
its ability to implement its fiscal consolidation targets, especially
in light of the downfall of the ruling coalition, which had been
committed to achieving these targets. While Moody's forecasts
a 1.1% growth in real GDP for 2012, risks remain firmly
on the downside as continued uncertainty hinders business and consumer
confidence in Slovakia and the broader euro area. Weaker revenue
collection will hamper the government's efforts to reduce its deficit
going forward, resulting in a further deterioration of the government's
balance sheet. The potential for further fiscal slippage remains
high, while the willingness of the new Slovak government to take
the steps needed to achieve the revised fiscal targets presents considerable
implementation risks.
WHAT COULD MOVE THE RATING UP/DOWN
Downward pressure on the rating could develop if Slovakia's economic
growth prospects deteriorate significantly, thereby obstructing
fiscal consolidation and leading to a significant further deterioration
in the government's balance sheet. A sharp intensification
of the euro area crisis and further deterioration of macroeconomic conditions
in Europe, leading to material fiscal and debt slippage in Slovakia,
could also pressure the country's rating. Moody's would
view such fiscal slippage negatively as it would lead to a deterioration
of policy credibility and debt dynamics. This would in turn adversely
affect Slovakia's funding prospects, increase rollover risk
and result in a higher cost of funding for the government.
Moody's would consider changing the negative outlook to stable in
the event of a sustained improvement in investor sentiment across the
euro area, thereby materially reducing the risk of contagion from
the euro area periphery. Similarly, a stabilisation in Slovakia's
debt metrics would reduce negative pressure on the rating. Although
unlikely in the foreseeable future, Moody's would upgrade
the rating in the event of a resumption of structural improvements,
a significant strengthening of the government's balance sheet and debt
ratios relative to the 'A' category, and resumed convergence of
Slovakia's credit metrics with EU levels.
Moody's downgrades Slovenia's government bond rating to A2
from A1, negative outlook
Moody's Investors Service has today downgraded Slovenia's
local- and foreign-currency government bond ratings to A2
from A1. The outlook remains negative.
The key drivers of today's rating action on Slovenia 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 risk to Slovenia's public finances from potential
further shocks, especially the possible need to provide further
support to the nation's banking system.
3.) The difficulties that Slovenia's small and open economy
faces in view of weak growth among key European trading partners,
and the resulting significant challenge to the government's ability
to achieve its medium-term fiscal consolidation plans.
Moody's is maintaining a negative outlook on Slovenia'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 Slovenia'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
Slovenia's susceptibility to financial and macroeconomic shocks
given the concerns identified below.
The deteriorating macroeconomic environment is exacerbating a number of
existing and potential pressures on the Slovenian government's balance
sheet, which are weighing on its creditworthiness and constitute
the second driver of Moody's one-notch downgrade of Slovenia's
bond rating. While somewhat shielded by manageable (but rising)
debt and debt servicing levels, Slovenia's public finances
are at risk from potential further shocks, stemming from a possible
further deterioration in the economic growth outlook in the euro area
and globally and the likely need to provide further support to the country's
banks.
In particular, the country's largest banks face asset quality,
capitalisation and funding challenges. In comparison with other
systems in Central and Eastern Europe, Slovenia has a large banking
sector, with total assets equivalent to 136% of GDP.
Asset quality pressure and the euro area debt crisis are weighing on the
sector's solvency and threaten its ability to continue to access
private funding markets. Non-performing loan ratios are
continuing to rise, reflecting concentrations of exposure towards
the highly leveraged corporate sector. Slovenian banks' asset
quality, profitability and funding position remain under considerable
stress, increasing the risk of additional governmental support being
needed, which would further pressure the sovereign's debt
metrics.
The third driver informing Moody's rating decision on Slovenia is
the threat to growth in the country's small and open economy given
the poor growth prospects among Slovenia's principal export markets
in Europe. Moreover, the ongoing significant adjustment in
Slovenia's highly leveraged corporate sector, particularly
the construction sector, and the deleveraging across all sectors
of the economy, are expected to continue to represent a drag on
economic activity for the next year or so. The weak economic outlook
poses a significant challenge to the Slovenian government's ability
to achieve its medium-term fiscal consolidation plans and may necessitate
additional fiscal measures that could further pressure the sovereign's
debt metrics.
These credit pressures have intensified and become more apparent in the
period since Moody's last rating action in December 2011,
and are contributing to the need to reposition Slovenia's rating
in the middle of the 'A' range.
WHAT COULD MOVE THE RATING UP/DOWN
A further downward adjustment in Slovenia's sovereign rating could
result from (i) a substantial intensification of the risks and uncertainties
for the Slovenian government's balance sheet, stemming from
the potential need for further support to banks; or (ii) a further
marked deterioration in economic growth prospects due to external shocks
stemming from the euro area crisis, which would in turn lead to
the potential failure of the government to stabilise and reverse the general
government debt trajectory.
Moody's would stabilise the outlook on Slovenia's rating in
the event of government progress in implementing economic and fiscal policies
that pave the way for a substantial and sustainable trend of increasing
primary surpluses, and lead to a significant reversal in the public
debt trajectory.
Moody's downgrades Spain's government bond rating to A3 from
A1, negative outlook
Moody's Investors Service has today downgraded the government bond rating
of the Kingdom of Spain to A3 from A1. The outlook on the rating
is negative.
Concurrently, Moody's has also downgraded the rating of Spain's
Fondo de Reestructuración Ordenada Bancaria (FROB) to A3 with a
negative outlook from A1, in line with the sovereign rating action,
given that FROB's debt is fully and unconditionally guaranteed by
the Kingdom of Spain. Both Spain's and the FROB's short-term
ratings have been downgraded to (P)Prime-2 from (P)Prime 1.
The key drivers of today's rating action on Spain 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 country's challenging fiscal outlook is being exacerbated
by the larger-than-expected fiscal slippage in 2011,
mainly on account of budget overshoots by Spain's regional governments.
Moody's is sceptical that the new government will be able to achieve
the targeted reduction in the general government budget deficit,
leading to a further increase in the rapidly rising public debt ratio.
3.) The pressures on the Spanish economy, which is close
to entering a renewed recession, will be further increased by the
need for even stronger action to achieve a deficit reduction. A
renewed recession will also negatively affect the profitability of Spanish
banks at a time when they are required to clean up their balance sheets.
Moody's is maintaining a negative outlook on Spain's sovereign
ratings 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 two-notch downgrade of Spain'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. This will in turn mean a high
potential for further shocks to funding conditions, which will affect
weaker sovereigns like Spain first, increasing its susceptibility
to other financial and macroeconomic shocks given the concerns identified
below.
The second driver underpinning the downgrade of Spain's sovereign
rating is Moody's expectation that the country's key credit
metrics will continue to deteriorate. The larger-than-expected
fiscal deviation reported for 2011 (with a general government deficit
of around 8% of GDP vs. a target of 6%) make the
country's fiscal outlook for 2012 even more challenging than Moody's
anticipated at the time of its last rating action on Spain. Moody's
acknowledges that the new government has taken timely action to compensate
for a large part of last year's fiscal slippage, and has also
taken steps to place the regional governments' finances under closer
supervision. However, the effectiveness of these steps remains
to be seen. Overall, the adjustment required to bring the
public finances back onto the targeted path (a budget deficit target of
4.4% of GDP in 2012) is unprecedented. According
to Moody's estimates, a total fiscal adjustment of approximately
EUR40 billion (3.7% of GDP) will be needed, compared
to a reduction in the deficit of around EUR28 billion in aggregate in
2010 and 2011.
Moody's is therefore sceptical that the target can be achieved and
expects the general government budget deficit to remain between 5.5%
and 6% of GDP. This in turn implies that the public debt
ratio will continue to rise. Under Moody's base-case
assumption, the debt ratio will be around 75% of GDP at the
end of the year, more than double the trough reached in 2007,
and will likely approach the 80% of GDP mark in the coming two
years. One of Spain's key relative credit strengths --
its lower debt-to-GDP ratio compared to some of its closest
peers in Europe -- is therefore eroding.
The third driver of today's rating action is the weakening Spanish
economy, which is likely to come under even greater pressure because
of the need for stronger action to achieve a deficit reduction.
Spain recorded a contraction in real GDP of 0.3% quarter-on-quarter
in Q4 of 2011 and Moody's expects Spain's GDP to contract
by a further 1%-1.5% in 2012, compared
to a forecast of low but positive growth of around 1% just a few
months ago.
A renewed recession will further affect the profitability of Spanish banks
at a time when they are expected to remove impaired real-estate-related
assets from their balance sheets. Moody's views positively
the new government's attempt to force the banking sector to increase
provisioning against problematic assets related to banks' exposure
to the real estate sector, thereby improving the transparency of
banks' balance sheets and contributing to restoring market confidence.
However, Moody's is doubtful that the government's plan
to encourage stronger banks to merge with weaker ones will be achievable
without further support from the public sector. The rating agency
therefore continues to believe that the contingent risks arising from
the banking sector are higher and more likely to crystallise in the case
of Spain than among many of its peers. Moody's recognises
that the labour market reforms, announced by the government on 10
February, are important steps to increase the flexibility in the
labour market and should help foster faster employment growth once the
economic recovery begins.
The decision to downgrade by two notches is explained by Moody's
view that Spain's credit fundamentals and outlook 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 Spain's
fiscal and growth challenges, nor do they have banking systems with
similar issues.
WHAT COULD MOVE THE RATINGS UP/DOWN
Moody's expects Spain's A3 rating to exhibit some degree of
tolerance to potential downside scenarios that may emerge in coming quarters,
including (i) a further modest deterioration in the macroeconomic outlook
relative to the rating agency's base case expectation; (ii)
a moderate deviation from the government's current fiscal targets
and limited additional cost to the government from supporting the restructuring
of the banking sector; as well as (iii) occasional political set-backs
in the progress towards agreeing and implementing the necessary reforms
to restore confidence.
However, Moody's rating would not be immune to a further substantial
deterioration in macroeconomic or financial market conditions, leading
to sharp fiscal and debt slippage in Spain, or to a substantial
erosion in Spanish policymakers' commitment to reform implementation.
The rating outlook could be stabilised at the current level if the wider
euro area situation were to be resolved conclusively. The rating
could be upgraded if and when the economy is placed on a clear and improving
trend and the public debt ratio has stabilised at sustainable levels.
Moody's changes the outlook on the United Kingdom's Aaa rating
to negative
Moody's Investors Service has today changed the outlook on the United
Kingdom's Aaa government bond rating to negative from stable.
The key drivers of today's action on the United Kingdom are:
1.) The increased uncertainty regarding the pace of fiscal consolidation
in the UK due to materially weaker growth prospects over the next few
years, with risks skewed to the downside. Any further abrupt
economic or fiscal deterioration would put into question the government's
ability to place the debt burden on a downward trajectory by fiscal year
2015-16.
2.) Although the UK is outside the euro area, the high risk
of further shocks (economic, financial, or political) within
the currency union are exerting negative pressure on the UK's Aaa
rating given the country's trade and financial links with the euro
area. Overall, Moody's believes that the considerable
uncertainty over the prospects for institutional reform in the euro area
and the region's weak macroeconomic outlook will continue to weigh
on already fragile market confidence across Europe.
Concurrently, Moody's has today also changed to negative the
outlook on the Aaa debt rating of the Bank of England in line with the
change of outlook on the UK's sovereign rating.
RATIONALE FOR NEGATIVE OUTLOOK
The primary driver underlying Moody's decision to change the outlook
on the UK's Aaa rating to negative is the weaker macroeconomic environment,
which will challenge the government's efforts to place its debt
burden on a downward trajectory over the coming years. These challenges,
reflecting the combined effect of a commodity price driven hit to real
incomes, the confidence shock from the euro area and a reassessment
of the lasting effects of the financial crisis on potential output,
were already evident in the government's Autumn Statement.
The statement announced that a further two years of austerity measures
would be needed in order for the government to meet its fiscal mandate
of achieving a cyclically adjusted current budget balance by the end of
a rolling five-year time horizon, and to reach its target
of placing net public sector debt on a declining path by fiscal year 2015-16.
Moody's central expectation is that these objectives will be met,
with a general government gross debt-to-GDP ratio peaking
at just under 95% in 2014 or 2015, before gradually declining
thereafter. However, Moody's expects the UK's
debt to peak later, and at a higher level, than in most other
Aaa-rated countries. Moreover, risks to the rating
agency's forecasts are skewed to the downside. In part,
these risks are the by-product of a necessary fiscal consolidation
programme and the ongoing parallel deleveraging process in both the household
and financial sectors. Moody's also believes that the further
cutbacks announced last autumn indicate that the government has a reduced
capacity to absorb further abrupt economic or fiscal deterioration without
incurring a further slippage in its consolidation timetable.
A combination of a rising medium-term debt trajectory and lower-than-expected
trend economic growth would put into question the government's ability
to retain its Aaa rating. The UK's outstanding debt places
it amongst the most heavily indebted of its Aaa-rated peers,
alongside the United States and France whose Aaa ratings also carry a
negative outlook.
The second and interrelated driver of Moody's decision to change
the UK's rating outlook to negative is the fact that the weaker
environment is also, in part, a by-product of the ongoing
crisis in the euro area. Although the UK is outside the euro area,
the crisis is affecting the UK through three channels: trade,
the financial sector and consumer and investor confidence.
Moody's believes that there is considerable 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
outlook complicates 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 the UK's susceptibility
to financial and macroeconomic shocks. Any such shock would pose
further risks to the performance of the UK economy and to the strength
of its financial sector, with inevitable consequences for the government's
ability to achieve fiscal consolidation on schedule. Moreover,
while the UK currently enjoys 'safe haven' status, there
is also a growing risk that the weaker macroeconomic outlook could damage
market confidence in the government's fiscal consolidation programme
and cause funding costs to rise.
RATIONALE FOR CONTINUED Aaa RATING
Although Moody's has some concerns about the UK's macroeconomic
outlook for the next few years, the UK's Aaa sovereign rating
continues to be well supported by a large, diversified and highly
competitive economy, a particularly flexible labour market,
and a banking sector that compares favourably to peers in the euro area.
The economy generally benefits from the significant structural reforms
undertaken in the past. As a result of these strong structural
features, Moody's expects the UK to eventually return to its
trend growth rate of around 2.5%, although the return
to trend growth is expected to be slower than originally expected,
reflecting the nature and depth of the financial crisis.
The current fiscal consolidation programme remains intact and the government
has demonstrated its willingness and ability to take action to address
shortfalls. The UK has been proactive in pushing banks to hold
more capital and in taking steps to reduce the probability and impact
of the sovereign having to use its own balance sheet to support British
banks. Further, the outstanding debt stock has important
structural features that give the UK government a very high shock-absorption
capacity.
The government is implementing an ambitious fiscal consolidation programme
and so far has been meeting , and even exceeding, its deficit
reduction forecasts. In the Autumn Statement, the Office
for Budget Responsibility (OBR) announced weaker economic growth forecasts,
to which the government responded by announcing further spending cuts,
both over the medium and long term. Although Moody's sees
rising challenges in achieving debt reduction within the timeframe that
has been laid out by the government -- not least the possible impact
of any future cutbacks on short-term growth -- the rating
agency believes that the UK government's response to negative developments
late last year indicates its commitment to restoring a sustainable debt
position. This suggests that the UK's track record of reversing
increases in debt is likely to continue going forward.
The UK's Aaa rating is also supported by the robust structure of
government debt. The UK has the lowest refinancing risk of all
the large Aaa economies, based on the average maturity of the UK's
debt stock (nearly 14 years), its large domestic investor base,
and the willingness and ability of its central bank to undertake accommodative
monetary policy.
WHAT COULD MOVE THE RATING DOWN
The UK's Aaa rating could potentially be downgraded if Moody's
were to conclude that debt metrics are unlikely to stabilise within the
next 3-4 years, with the deficit, the overall debt
burden and/or debt-financing costs continuing on a rising trend.
This could happen in one of three scenarios, all of which would
imply lower economic and/or government financial strength: (1) a
combination of significantly slower economic growth over a multi-year
time horizon -- perhaps due to persistent private-sector deleveraging
and very weak growth in Europe -- and reduced political commitment
to fiscal consolidation, including discretionary fiscal loosening
or a failure to respond to a deteriorating fiscal outlook; (2) a
sharp rise in debt-refinancing costs, possibly associated
with an inflation shock or a deterioration in market confidence over a
sustained period; or (3) renewed problems in the banking sector that
force a resumption of official support programmes and spill over into
the real economy, indirectly causing lower growth and larger budget
deficits.
Conversely, the rating outlook could return to stable if the combination
of less adverse macroeconomic conditions, progress towards containing
the euro area crisis and deficit reduction measures were to ease medium-term
uncertainties with regards to the country's debt trajectory.
REGULATORY DISCLOSURES
Although the following credit ratings have been issued in a non-EU
country which has not been recognized as endorsable at this date,
these credit ratings are deemed "EU qualified by extension"
and may still be used by financial institutions for regulatory purposes
until 30 April 2012. Further information on the EU endorsement
status and on the Moody's office that has issued a particular Credit
Rating is available on www.moodys.com.
Government of Finland
Government of Malta
Government of Portugal
Government of Slovakia
Fondo de Reestructuracion Ordenada Bancario
Malta Freeport Corporation Limited
For ratings issued on a program, series or category/class of debt,
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parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information. Revised release follows.
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Moody's adjusts ratings of 9 European sovereigns to capture downside risks