I’m not really one for the sentimentality of Valentine’s Day – and it appears Moody’s isn’t, either.
The credit ratings agency showed zero love to Europe today and while most folks received flowers and chocolates, nine countries got gourmet lumps of coal instead.
The recipients: Italy, Spain, Portugal, Malta, Slovenia and Slovakia – all of which had their credit ratings cut.
And not to be left out, Britain, France and Austria had their credit outlooks lowered to “negative,” which means there’s a 30% chance of a full downgrade within 18 months.
The downgrades follow a similar move last month from fellow ratings agency, Standard and Poor’s.
Here’s the tale of the tape…
“Uncertain Prospects” + “Weak Macroeconomic Outlook” = Downgrade
The timing of Moody’s downgrades comes as no surprise.
Amid a particularly turbulent period, Greece’s litany of problems have thrust Europe into the spotlight and called the viability of the entire eurozone into question.
And there’s still no concrete resolution. Just two days after Greek politicians approved three billion euros worth of austerity measures – in order to qualify for the 130-billion-euro bailout package – there was yet another bump in the road.
Jean-Claude Juncker, who heads the 17-member eurozone nations, called off a face-to-face meeting with the bloc’s finance ministers and European Central Bank President, Mario Draghi, today, stating that more work was first needed to address “outstanding issues.”
Specifically, the ministers haven’t received assurances from Greece over its austerity plan and how it proposes to implement the cuts, including an additional 325 million euros worth of savings.
So Juncker decided not to waste everyone’s time by putting them on flights to Brussels and will instead hold a conference call tomorrow.
Moody’s isn’t hanging around, though.
As the back-and-forth continues, it’s no wonder that the agency specified the following reasons for its mass downgrades today:
“The considerable uncertainty over the euro area’s prospects for institutional reform of its fiscal and economic framework and the region’s weak macroeconomic outlook will continue to weigh on already fragile market confidence across Europe.”
And Moody’s has acted accordingly…
A Valentine’s Day Moody’s Massacre
The agency reserved the bulk of its venom for three of the so-called “PIIGS” – Portugal, Italy and Spain (Ireland was spared).
It bashed Spain’s credit rating down by two levels – from A1 to A3 – citing the bloated debts among Spain’s regional governments and a higher-than-expected budget deficit. It came just a day after several big Spanish banks, including Santander, saw their own credit ratings downgraded.
Quoted on the BBC, Moody’s said:
“The adjustment required to bring the public finances back onto the targeted path (a budget deficit target of 4.4% of GDP in 2012) is unprecedented.”
Troubled Italy saw its rating chopped from A2 to A3, as it, plus Spain, battles recession and soaring unemployment. Portugal suffered a smaller haircut – from Ba2 to Ba3.
Moody’s wasn’t done, either. While it stopped short of issuing actual downgrades, it put Britain, France and Austria on alert by placing a “negative” credit outlook on them.
Chancellor Under Fire
The decision has caused much gnashing of teeth in my home country, where British Chancellor, George Osborne, is under pressure to preserve the country’s sacred AAA credit rating.
Next month, he’ll deliver his budget to parliament. And for a man who places great emphasis on credit ratings and being out of the eurozone mess, Moody’s assertion that the United Kingdom is now at greater risk due to the eurozone is a sharp blow.
Of course, Britain has plenty of its own problems – namely, a budget deficit of approximately £165 billion, projected GDP growth of less than 1% this year, and unemployment at a 17-year high. As a result, Moody’s said “materially weak growth prospects over the next few years” could see the country miss its 2015 deficit-cutting target.
Opponents have leapt on Moody’s decision and criticized Osborne’s strategy for cost-cuts, job creation and economic growth, calling on him to shift course. But it doesn’t appear likely. Osborne is defiant:
“This is a reality check for anyone who thinks Britain can duck confronting its debts… proof that in the current global situation, we cannot waver. Moody’s are explicit that it’s only the government’s ‘necessary fiscal consolidation’ that is stopping an immediate downgrade, which would happen if there were any ‘reduced political commitment to fiscal consolidation.’”
Ah, austerity… I hardly knew ye. “Fiscal consolidation” is apparently what we’re calling it these days.