Credit rating agency Moody’s downgraded on Monday evening six euro area countries, including Italy, Spain and Portugal, and warned it may lower “AAA” ratings of France, Austria and Great Britain, because of the debt crisis in Europe. Moody’s has taken measures which are less aggressive in the euro area countries than agency Standard & Poor’s, which downgraded in January ratings of nine euro area countries, including France and Austria – who lost their “immaculate” triple-A rating.
Fitch downgraded in January the ratings of Belgium, Cyprus, Italy, Slovenia and Spain, also indicating a 50% opportunity for further demotions over the next two years. Moody’s decision questions for the first time the “AAA” rating of Great Britain. The agency indicated concerns about Europe’s ability to implement reforms and engage the necessary funds needed to solve the crisis. Moody’s also notes that the difficult economic situation in Europe could prevent some governments to take austerity measures strong enough to sort out the public finances.
Rating outlook for France, Austria and Great Britain was changed to negative due to “several specific pressures in the credit situation, which would increase the vulnerability of these countries”. The “AAA” rating of Germany is described by Moody’s as “adequate” and the agency has reaffirmed the triple-A rating of the European Financial Stability Fund EFSF, which was downgraded in January by S & P by a notch to “AA+”.
The agency lowered by one step the ratings of Italy, Portugal, Sovaciei, Slovenia and Malta, and Spain was downgraded by two notches. The outlook of downgraded countries was set to negative. Moody’s notes that the severity of decision was reduced by the commitment of European authorities to maintain the monetary union and implement any necessary measures to restore market confidence.
Greek Parliament previously approved a new set of tough austerity package to obtain foreign loans needed to avoid bankruptcy. The euro and British pound fell against the dollar after Moody’s announcement, but stock markets did not react immediately, probably because the agency announced in December that it will review ratings of euro area countries.
British Minister of Finance, George Osborne, responded saying that Britain should keep its promise and reduce the huge budget deficit. “It is a proof that, in the current global situation, the United Kingdom can not postpone solving its debt problem. If anybody believes that Britain can avoid the confrontation of its debt must wake up to reality”, he said.
The French government indicated that it would maintain policies to improve economic competitiveness and growth, while reducing the budget deficit.
“The Government is committed to continue its work to enhance growth and competitiveness, particularly through the reform of financing social programs, labor market and reducing the public deficits”, said in a statement the French Minister of Finance, Francois Baroin.
Austria challenged Moody’s warning that it could lower the country’s triple-A rating, showing that the agency has not given sufficient consideration to the multi-annual program of the Vienna government for budget balance and debt reduction. “The package of consolidated budget recently adopted has not received sufficient consideration in the revision of outlook. Moody’s assumed an upward trend of indebtedness, while the new direction of deficit shows a clear decrease starting 2012”, it said a release Tuesday of the Ministry of Finance in Vienna. Austria wants to balance the budget by 2016 through a mix of spending cuts and tax increases. Government debt is estimated to decrease to 71% of GDP by 2016 from a peak of 75.4% next year.
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