13 February 2012

Moody's adjusts ratings of nine European sovereigns to capture downside risks

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

The main drivers of these 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 macro-economic 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 macro-economic 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.

Full statement

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