Euro Region’s Debt Quality Is Worsening at Record Pace: Chart of the Day
Oct. 24 (Bloomberg) -- Domenico Lombardi, a senior scholar at the Brookings Institution, talks about the outlook for resolving the European sovereign debt crisis and this week's European Union summit. Lombardi speaks with Mark Crumpton on Bloomberg Television's "Bottom Line." (Source: Bloomberg)
The euro area’s credit quality is fading at an unprecedented pace, posing a risk to the region’s main tool against the debt crisis as leaders struggle to convince investors they have the situation under control.
The CHART OF THE DAY shows the average rating for the bloc, calculated by Bloomberg from the assessments of the three main evaluators, has worsened to 3.14, representing the third-best grade, from 2.12 in May 2010 when the European Financial Stability Facility was designed. The measure fell 0.23 point in the previous 15 months. The average is calculated by giving a numerical grade for each grading, where 1 is the highest, and adjusting it for each country’s share of the EFSF guarantee.
Seven of the 17 euro-sharing nations have had their ratings downgraded since the announcement of the facility, which maintains a top grade from Standard & Poor’s, Moody’s Investors Service and Fitch Ratings. As the contagion has spread to banks, prompting governments to work out recapitalization plans, further cuts, mainly for the top-rated countries, may reduce the strength of the fund.
“There will be more downgrades,” said Ciaran O’Hagan, Paris-based head of euro-area fixed-income strategy at Societe Generale SA. “While EFSF participation itself will not trigger ratings action, it adds to the pressure. It’s not the key problem, but could be the straw that breaks the camel’s back.”
Concern has spread to France, which is the second-biggest backer of the EFSF after Germany, providing 20 percent of the 780 billion euros ($1.1 trillion) of guarantees. Moody’s said Oct. 18 the French rating is under pressure because of the crisis, while S&P said three days later the country is among euro-sharing sovereigns likely to be downgraded in a stressed economic scenario.
Ratings companies cited guarantees exceeding loan capacity and a cash buffer among the reasons for their decision to award the best grade to the EFSF. Still, the rating may come under threat from rating changes at contributor nations and will be “particularly sensitive” to changes for triple-A-rated Germany, France and the Netherlands, Moody’s has said.
To contact the reporters on this story: Radoslav Tomek in Bratislava at rtomek@bloomberg.net; Krystof Chamonikolas in Prague at kchamonikola@bloomberg.net
To contact the editors responsible for this story: M. Gomez at jagomez@bloomberg.net; Gavin Serkin at gserkin@bloomberg.net
Rate These Stories
Rate this Page