Standard & Poor’s Ratings Services on Dec 5 placed its long-term sovereign
ratings on 15 members of the European Economic and Monetary Union (EMU or
eurozone) on CreditWatch with negative implications: Austria, Belgium, Estonia, Finland, France, Germany, Ireland, Italy, Luxembourg, Malta Netherlands, Portugal, Slovakia, Slovenia, Spain.
We now think that there is at least a one-in-two chance that we will lower each of the ratings that we have placed on CreditWatch.
WHAT PROMPTED THE CREDITWATCH PLACEMENTS?
In our view, systemic stress in the eurozone has risen in recent weeks and
reached such a level that a review of all eurozone sovereign ratings is
warranted.
We believe that this systemic stress emanates from five interrelated factors.
We also believe that these factors influence the creditworthiness, in varying
degrees, of all the members of the eurozone.
- Banks operating in the eurozone have tightened credit conditions
markedly. They have done so in response to: (i) higher prospective
capital requirements from the European Banking Association or from Basel III; (ii) worsening asset quality both in their loan books and their
government bond portfolios; and (iii) a spike in their marginal funding
costs.
- Banks and portfolio investors alike have also started to require
significantly higher risk premiums for an increasing number of eurozone
sovereign issuers, including ‘AAA’-rated sovereigns. In addition to
country-specific factors (such as high borrowing requirements in the
first quarter of next year), we believe that these higher premiums
reflect: (i) prospective changes in the composition of these governments’
creditor classes (with official creditors, enjoying presumed preferred
creditor status, having a greater share of outstanding debt); (ii)
changes in the regulation of credit default swaps and their perceived
utility as hedge vehicles; and (iii) the lower capacity of some
government bond market makers to carry inventory.
- The open and prolonged dispute among European policy makers over the
proper approach to provide official assistance on behalf of the EU and
the funding amounts necessary to reverse declining investor sentiment,
which we believe is in turn negatively affected by what many investors
consider to have been reactive and insufficient policy responses to date.
- High levels of government and household indebtedness. The government
indebtedness has led most eurozone governments to undertake fiscal
consolidation programs to stabilize their debt to GDP ratios and thus to
restore fiscal room to manoeuvre. High household indebtedness coupled
with rising economic uncertainty has increased precautionary household
savings in an attempt to reduce leverage in an uncertain economic
climate, thereby reducing consumer spending.
- Weakening growth prospects for 2012. In our view, signs of what we see as
Europe’s approaching recession were foreshadowed in the so-called
periphery and the economic strain is now increasingly being felt in the
eurozone’s core of France and Germany . . . We believe that the deteriorating macroeconomic outlook is partly reflecting the declining confidence of economic agents in European policymakers’ ability to arrest the current financial crisis. We assign a 40% probability of an outright recession with negative GDP growth in the eurozone for 2012.
Credit FAQ: Factors Behind Our Placement Of Eurozone Governments On CreditWatch also addresses the following questions:
WHY ARE YOU TAKING THESE ACTIONS NOW BEFORE A MAJOR SUMMIT?
WHAT SORT OF RESPONSE BY POLICYMAKERS DO YOU THINK MIGHT ADDRESS THESE CONCERNS?
HOW ARE THESE CONSIDERATIONS TAKEN INTO ACCOUNT IN YOUR RATING ANALYSIS?
WHEN WILL YOU RESOLVE THE CREDITWATCH STATUS?
HOW FAR COULD YOU LOWER THE RATINGS ON CREDITWATCH?
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