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Global Credit Research - 28 Nov 2011
London, 28 November 2011 -- The continued rapid escalation of the euro area sovereign and banking
credit crisis is threatening the credit standing of all European sovereigns,
cautions Moody's Investors Service in a new Special Comment.
In the absence of policy measures that stabilise market conditions over
the short term, or those conditions stabilising for any other reason,
credit risk will continue to rise. Moody's new report notes
that, amid the increasing pressure on euro area authorities to act
quickly to restore credit market confidence, the constraints they
face are also rising. While the euro area as a whole possesses
tremendous economic and financial strength, institutional weaknesses
continue to hinder the resolution of the crisis and weigh on ratings.
In terms of the policy framework, the euro area is approaching a
junction, leading either to closer integration or greater fragmentation.
While Moody's central scenario remains that the euro area will be
preserved without further widespread defaults, even this 'positive'
scenario carries very negative rating implications in the interim period.
The rating agency notes that the political impetus to implement an effective
resolution plan may only emerge after a series of shocks, which
may lead to more countries losing access to market funding for a sustained
period and requiring a support programme. This would very likely
cause those countries' ratings to be moved into speculative grade
in view of the solvency tests that would likely be required and the burden-sharing
that might be imposed if (as is likely) support were to be needed for
a sustained period.
However, over the past few weeks, the likelihood of even more
negative scenarios has risen. This reflects, among other
factors, the political uncertainties in Greece and Italy,
uncertainty around the final haircut imposed on holders of Greek debt,
the emphasis in the recent Euro Summit statement on the conditional nature
of the existing support programmes and the further worsening of the economic
outlook across the euro area. Alternative outcomes fall into two
broad categories: those involving one or more defaults by euro area
countries (in addition to Greece's PSI programme); and those
additionally involving exits from the euro area.
The probability of multiple defaults (in addition to Greece's
private sector involvement programme) by euro area countries is no longer
negligible. In Moody's view, the longer the liquidity
crisis continues, the more rapidly the probability of defaults will
continue to rise.
A series of defaults would also significantly increase the likelihood
of one or more members not simply defaulting, but also leaving the
euro area. Moody's believes that any multiple-exit
scenario -- in other words, a fragmentation of the euro --
would have negative repercussions for the credit standing of all euro
area and EU sovereigns.
Moody's notes that the situation is fluid and fast-moving.
Policymakers are likely to respond to the escalating risks with new measures,
the credit implications of which will require careful consideration.
In the meantime, new shocks to financing conditions -- whether
the announcement of new programmes or simply a further acceleration in
the rise of funding cost across the euro area -- are likely to lead
to selective rating changes. More broadly, in the absence
of major policy initiatives in the near future which stabilise credit
market conditions, or those conditions stabilising for any other
reason, the point is likely to be reached where the overall architecture
of Moody's ratings within the euro area, and possibly elsewhere
within the EU, will need to be revisited. Moody's expects
to complete such a repositioning during the first quarter of 2012.
Moody's report, entitled "Rising Severity of Euro Area Sovereign
Crisis Threatens Credit Standing of All EU Sovereigns", is available
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MD - Sovereign Risk
Sovereign Risk Group
Moody's: Rising Severity of Euro Area Sovereign Crisis Threatens EU Sovereign Ratings
Moody's Investors Service Ltd.
One Canada Square
London E14 5FA
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
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