Moody’s Says All Euro-Region Sovereign Ratings Threatened by Debt Crisis

By Shamim Adam - Nov 28, 2011 11:55 AM GMT+0700

Moody’s Investors Service said the “rapid escalation” of Europe’s debt and banking crisis is threatening all of the region’s sovereign ratings.

Credit risks will continue to rise without measures to stabilize markets in the short term, the ratings company said in a statement today. European Union policy makers also face constraints to act quickly to restore confidence, it said.

“In the absence of major policy initiatives in the near future which stabilize credit market conditions, or those conditions stabilizing 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,” the statement said. “Moody’s expects to complete such a repositioning during first quarter of 2012.”

The European crisis so far has cost five leaders their jobs, including Italian Prime Minister Silvio Berlusconi. Euro- area finance ministers will meet in Brussels tomorrow as governments bid to regain the confidence of financial markets after a week in which the euro-area sovereign debt crisis worsened.

Investors are shunning riskier countries’ bonds as Italy, which has a bigger debt load than Spain, Greece, Ireland and Portugal combined, struggles to ward off contagion from a debt crisis that started in Greece more than two years ago. Hungary lost its investment-grade rating at Moody’s last week.

EU Discord

“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,” it said. “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 program.”

The probability of multiple defaults by euro-area countries is no longer negligible, Moody’s said, adding that 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 said. “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.”

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net