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Moody's: 2010 likely to be challenging for European sovereign risk

Global Arab Network - - Adam Turner

Wednesday, 13 January 2010 09:53

In the first regular issue of its "European Sovereign Outlook" -- entitled "Diverging Conditions Heighten Significance of Exit Strategies" -- Moody's Investors Service says that 2010 may prove to be a difficult year for European sovereign debt issuers. The rating agency's view is based on the uncertainties surrounding the likely pace and intensity of exit strategies as governments start to unwind their fiscal stimulus and quantitative easing programs.

Two factors look likely to dominate Moody's 2010 rating actions in Europe. First, will countries that have adopted counter-cyclical policies during the downturn be able to devise and implement successful exit strategies as their recoveries gain traction? The ratings of those countries that do will be more secure than those that do not, since their debt metrics should improve accordingly.

Second, what happens if "adjustment fatigue" sets in? Will countries that face more deep-seated economic or fiscal problems overcome them -- or even be inclined to try to overcome them if the task is both painful and take an extended effort? Again, Moody's ratings of those countries that do stay the course of reform will be more secure than those that do not, since they should be able to restore any lost competitiveness and avoid a structurally higher debt burden.

The region's ratings will likely be scrutinised even more closely than usual this year. In Moody's sovereign rating universe, European governments have seen some of the most dramatic deteriorations in their debt metrics. "Also, our assumptions about those countries that will be able to restore their economic and fiscal health and those that will not be able to will be tested, particularly in the Aa-A range," says Anthony Thomas, a Vice-President-Senior Analyst in Moody's Sovereign Risk Group.

A key factor that has prevented complete economic and financial meltdown has been the collapse in interest rates. As a result, debt affordability has not deteriorated nearly as much as it would otherwise have done.

However, if markets were to switch their concerns about weak economic activity to fears of inflation and market rates were to rise significantly, thereby revealing the true cost of the crisis in terms of making debt less affordable, Moody's cautions that more highly indebted countries could find their ratings tested.

"In summary, expectations are low. No-one is under any illusions about the scale of the task facing European economies and policymakers, which is no bad thing," adds Mr. Thomas.

The "European Sovereign Outlook" is a regular publication explaining our views and perspectives on sovereign ratings in Europe. It is one of three regional outlooks being published by Moody's Sovereign Risk Group this month, the other two will cover Latin America and Asia-Pacific. Two other regular reports further detail Moody's perspectives on sovereign ratings, the quarterly "Aaa Sovereign Monitor," which focuses on the highest-rated sovereigns, and the annual "Sovereign Risk Outlook," which provides a year-end review of global sovereign ratings activity and perspectives for the coming year. The latest editions of these reports were published in December 2009.

Global Arab Network

Extracted from "Corporate release"

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