Moody’s Downgrades European Sovereign Debt and Gives UK ‘Negative Outlook’

Moody’s has raised the spectre of a downgrade of UK’s AAA credit rating after saying the country has a ‘negative outlook’ on its sovereign debt. The action by the credit rating agency (CRA) came as part of an assessment of European countries’ individual susceptibility to the eurozone crisis. France and Austria’s AAA ratings have also been placed on negative outlook as part of the same Moody’s assessment, which in addition actually downgraded six other European countries including Spain and Italy which have long been under threat from the eurozone ‘contagion’.

Moody’s is worried that slow economic growth and the threat of a second recession in the UK in three years will make it hard for the government to bring the country’s debt under control. Allied to the on-going eurozone crisis, which is negatively affecting growth prospects and stability across the entire region, Moody’s decided to place the UK’s debt rating on ‘negative outlook’, which is one step better than ‘negative watch’ in the arcane language of CRAs but still suggests an approximately 30% chance of a full blown downgrade looking at the history of previous such announcements.

Reacting to the news the UK Chancellor, George Osborne, sought to turn the bad news into a positive for his debt reduction plan by saying that Moody’s decision was a “reality check” and should be interpreted as such for anyone who though Britain could avoid “confronting its debts”.

France’s coveted AAA rating from Standard and Poor’s (S&P) was already downgraded by the rival CRA last month in a separate action, reinforcing the generally negative prospects for the region at the moment.

Spain and Italy’s downgrading by Moody’s in this latest assessment, moving the nations’ sovereign debt respectively from A1 to A3 and from A2 to A3, could be just as serious to the UK as the country’s own CRA warning; Britain has considerable exposures to these economies thought to total nearly €130bn.

The full list of 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.

Moody’s stressed that its main drivers for the reassessments were the uncertainty over the eurozone’s prospects for institutional reform of its fiscal and economic framework and the resources that will be made available to deal with the crisis.

Europe’s increasingly weak macroeconomic prospects, which threaten the implementation of domestic austerity programmes in the UK and elsewhere were also cited, alongside concerns about countries ability to make the structural reforms that are needed to promote competitiveness – presumably a reference to Portugal. In conclusion, Moody’s said it thought all these factors would have a bad impact on market confidence, with the high potential for further shocks to funding conditions for stressed sovereigns and banks only acerbating the problem.


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