Moody’s Threatened Euro Area Downgrades

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Problems in Spain and Greece have gotten bad enough that the balance of Europe’s finances have already been dragged into the growing hole. Recent economic data from Germany show that even its imports and exports and PMI have been affected.

Today, Moody’s reacted with a  harsh warning about the spread of the sovereign debt crisis. The re-examination of ratings could spread to even the Aaa rated nations:

Moody’s wrote

Recent developments in Spain and Greece could lead to rating reviews and  actions on many of the euro area countries, says Moody’s Investors  Service in the report “Rating Euro Area Governments Through Extraordinary  Times — Implications of Spain’s bank recapitalisation needs  and the rising risk of a Greek Exit”.

As Spain moves closer to the need for direct external support from its  European partners, the increased risk to the country’s creditors  may prompt further rating actions. The official estimates of recapitalising  Spain’s banking system have risen significantly and the country’s  indirect reliance on European Central Bank (ECB) funding via its banks  has been growing. Moody’s is assessing the implications of  these increased pressures and will take any rating actions necessary to  reflect the risk to Spanish government creditors. Moody’s  rating on Spain is currently A3 with a negative outlook.

However, Spain’s banking problem is largely specific to the  country and is not likely to be a major source of contagion to other euro  area countries, except for Italy, which likewise has a growing  funding reliance on the ECB through its banks.

In contrast, Moody’s says that if the risk of a Greek exit  from the euro were to rise further, it could lead to additional  rating pressures throughout the region. Greece’s exit from  the euro would lead to substantial losses for investors in Greek securities,  both directly as a result of the redenomination and indirectly as a result  of the severe macroeconomic dislocation that would likely follow.  It could also pose a threat to the euro’s continued existence.

The risk of a Greek exit particularly affects the credit standing of Cyprus  (Ba1, Negative), Portugal (Ba3, Negative), Ireland  (Ba1, Negative), Italy (A3, Negative) and Spain.  However, should Greece leave the euro, posing a threat to  the euro’s continued existence, Moody’s would review  all euro area sovereign ratings, including those of the Aaa nations.

 

 

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