Moody’s Investors Service cut the debt ratings of six European countries including Italy, Spain and Portugal and said it may strip France and the U.K. of their top Aaa ratings, citing Europe’s debt crisis.
Spain was downgraded to A3 from A1 yesterday, Italy to A3 from A2 and Portugal to Ba3 from Ba2, all with negative outlooks. Slovakia, Slovenia and Malta also had their ratings lowered.
“Policy makers have made steps forward but we do not think they have done enough to reassure the market that we are on a stable path,” said Alistair Wilson, chief credit officer for Europe at Moody’s in London. “What will guide long-term ratings is the clarity and the performance of policy makers and the macro picture.”
The euro reversed losses after a report showed German investor confidence rose more than economists forecast in February. Moody’s decision highlighted the risk that the European debt crisis will deepen even as the region’s finance ministers prepare to meet tomorrow to discuss a second aid package for Greece, following the country’s approval of austerity measures.
Still, recent rating reductions have done little to deter investors, who poured money into the government bonds of nations such as France and Austria even after the countries lost their AAA ratings at Standard & Poor’s last month. U.S. Treasuries returned three times as much as AAA corporate bonds since the world’s biggest economy was cut by one rank in August.
“The ratings agencies are kind of behind the curve,” said Shen Jianguang, chief economist for Greater China at Mizuho Securities Asia Ltd., who previously worked for the International Monetary Fund. “The risks have actually been falling in Europe. There may be worries that countries cutting fiscal spending may drag on their economic growth, but the concerns aren’t new and the downgrade should have minimal impact on market sentiment.”
The Stoxx Europe 600 Index rose 0.3 percent at 12 p.m. in Frankfurt, reversing earlier losses. The euro appreciated 0.2 percent, trading at $1.3205.
“The uncertainty over the euro area’s prospects for institutional reform of its fiscal and economic framework,” and the resources that will be made available to deal with the crisis, are among the main drivers of Moody’s action, the ratings company said.
Moody’s yesterday also lowered its outlook on Austria’s Aaa rating to negative. Malta’s rating was downgraded to A3 from A2, and Slovakia and Slovenia were both downgraded to A2 from A1. All three were given negative outlooks. In a statement earlier today, the ratings company affirmed its top Aaa rating for the European Financial Stability Facility.
Moody’s said Europe’s “increasingly weak macroeconomic prospects” threaten the “implementation of domestic austerity programs and the structural reforms that are needed to promote competitiveness.” It said market confidence “is likely to remain fragile, with a high potential for further shocks to funding conditions for stressed sovereigns and banks.”
Investors have ignored credit rating companies’ concerns about Europe and focused instead on steps taken by policy makers to end the crisis. While Standard & Poor’s on Jan. 13 cut the credit rating of nine euro-region states, yields on most governments bonds continued to edge lower since the European Central Bank on Dec. 21 allotted a record 489 billion euros ($643 billion) in three-year loans to banks.
Yields on Italian 10-year bonds have dropped more than 1 percentage point since ECB’s injection, while French 10-year yields have declined 20 basis points in that period.
In the U.K., Chancellor of the Exchequer George Osborne said his fiscal consolidation program is the only thing stopping Britain from an immediate downgrade.
“This is proof that, in the current global situation, Britain cannot waver from dealing with its debts,” Osborne said in an e-mailed statement released by the Treasury in London yesterday.
The spending cuts that helped the U.K. preserve its AAA credit rating at Standard & Poor’s last year and bolstered the pound have weighed on the currency this year as investors lose confidence that Prime Minister David Cameron will revive economic growth. Sterling had its worst January since 2008 against a basket of nine developed-market peers, falling 0.6 percent, after a 3.1 percent advance in the second half of 2011, according to data compiled by Bloomberg.
The National Institute for Economic and Social Research forecasts the U.K. economy will shrink 0.1 percent this year and grow 2.3 percent in 2013, compared with previous projections in October for growth of 0.8 percent and 2.6 percent.
“The U.K.’s fiscal trends are relatively weak among top-rated countries, mainly because of the U.K.’s relatively high pre-crisis structural deficit and recent prolonged economic weakness,” Michael Saunders, chief European economist at Citigroup Inc. in London, wrote in an e-mailed note. “A negative outlook statement typically indicates there is about a one in three chance of a ratings downgrade in the next 18 months.”
French Finance Minister Francois Baroin said the country’s AAA rating was maintained by Moody’s because of “the size of its economy” and its “increased productivity.”
Baroin’s comments were included in an e-mailed statement from the Finance Ministry after Moody’s downgraded the rating outlook to negative.
Germany and the European Commission yesterday welcomed Greek approval of the austerity steps demanded for a financial lifeline, suggesting euro finance chiefs will pull Greece back from the brink when they meet tomorrow.
The Greek parliament’s backing “is a crucial step forward toward the adoption of the second program,” EU Economic and Monetary Affairs Commissioner Olli Rehn told reporters in Brussels. “I’m confident that the other conditions, including for instance the identification of the concrete measures of 325 million euros, will be completed by the next meeting” of finance ministers.
Euro-area finance chiefs will convene in Brussels for their second extraordinary meeting on Greece in a week. Frustrated after two years of missed budget targets, ministers declined to ratify the 130 billion-euro package in a special session on Feb. 9, demanding that Greek officials put their verbal commitments into law.
“It’s important for now to complete this program,” German Chancellor Angela Merkel said in Berlin. “The finance ministers will meet again on Wednesday to undertake the work on this, but there can’t and there won’t be any changes to the program.”