28.11.2011

By Simon Miller

Rating agency Moody’s has warned that the eurozone sovereign debt crisis threatens the credit rating of all European government bonds.

In a report the ratings agency pointed out that while it’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 added that the absence of policy measures that would stabalise market conditions meant that credit risk would continue to rise.

However, it pointed out that while there was increasing pressure to act, constraints were also rising.

“While the euro area as a whole possesses tremendous economic and financial strength, institutional weaknesses continue to hinder the resolution of the crisis and weigh on ratings. In terms of the policy framework, the euro area is approaching a junction, leading either to closer integration or greater fragmentation,” the report said.

Moody’s added that an effective resolution plan might 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 programme”.

It continued: “This would very likely cause those countries' ratings to be moved into speculative grade in view of the solvency tests that would likely be required and the burden-sharing that might be imposed if (as is likely) support were to be needed for a sustained period.”

The report also warned that the probability of multiple defaults was no longer negligible with the probability of defaults rapidly rising the longer the liquidity crisis continues.

It added: “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 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.”