European Nations Face Downgrade, Moody’s Says

By Ben Livesey and Chiara Vasarri - Oct 5, 2011 4:32 PM GMT+0700

Moody’s Investors Service followed its three-level downgrade of Italy by warning that euro-area nations rated below the top Aaa level may see their rankings cut amid contagion from the region’s debt crisis.

“All but the strongest euro-area sovereigns are likely to face sustained negative pressure on their ratings,” Moody’s said in a statement late yesterday in London. “Consequently, Moody’s expects fewer countries below Aaa to retain high ratings.” It added that “there are no immediate pressures that could cause downgrades for Aaa-rated countries.”

The statement came after the company cut Italy’s rating for the first time since 1993 on concern the government will struggle to reduce the region’s second-largest debt amid chronically weak growth. Italy was lowered to A2 from Aa2. Standard & Poor’s downgraded Italy on Sept. 20 for the first time in five years.

“Italy is being punished not because its finances suddenly deteriorated, but because investors have become more sensitive to its long-standing weaknesses,” Nicholas Spiro, managing director at Spiro Sovereign Strategy in London, wrote in an e- mail. “Depending on one’s view, Italy is just as safe, or just as risky, as it was before it was dragged into the crisis.”

The Moody’s warning underscores the deterioration in euro- region sovereign finances as growth slows and debt piles up. Eleven of the 17 nations that share the single currency have ratings below Aaa. The top ranking is held by Austria, Finland, France, Germany, Luxembourg and the Netherlands.

Spread Widens

The yield spread on 10-year Italian bonds and similar German securities rose widened to 379 basis points at 11:20 a.m. in Rome. “Italian spreads are already implying a BBB credit rating and we don’t expect huge reaction from the market to this Moody’s action,” Alessandro Giansanti, a strategist at ING Bank NV in Amsterdam, wrote in a note to investors.

European stocks climbed, snapping a three-day decline amid speculation policy makers are examining measures to shield banks from the sovereign-debt crisis. The benchmark Stoxx Europe 600 Index jumped 1.6 percent as of 10:28 a.m. in Rome.

Today’s rebound comes after European stocks registered the longest losing streak in four weeks as policy makers signaled they may renegotiate terms of Greece’s bailout, deepening concern about the impact of the debt crisis.

European finance chiefs meeting this week considered “technical revisions” to the second Greek bailout, Luxembourg Prime Minister Jean-Claude Juncker said yesterday, fueling concern bondholders may have to take bigger losses on the nation’s debt.

‘Profound Loss’

“There has been a profound loss of confidence in certain European sovereign debt markets, and Moody’s considers that this extremely weak market sentiment will likely persist,” the ratings company said in yesterday’s statement. “It is no longer a temporary problem that might be addressed through liquidity support, and several euro-area governments are increasingly affected by the loss of confidence.”

In the absence of a rapid return to growth and market confidence, euro-area nations “will at some point have to choose between increasing the level of mutual support and managing further defaults,” Moody’s said. “The former option is the one that euro-area policy makers are more likely to adopt.”

To contact the reporters on this story: Ben Livesey at blivesey@bloomberg.net; Chiara Vasarri in Rome at cvasarri@bloomberg.net

To contact the editors responsible for this story: Angela Cullen at acullen8@bloomberg.net.