WASHINGTON (MNI) – Standard & Poor’s Friday took rating actions on
16 Eurozone governments, including downgrading France, Italy and Spain
while affirming Germany’s ‘AAA’. “Today’s rating actions are primarily
driven by our assessment that the policy initiatives that have been
taken by European policymakers in recent weeks may be insufficient to
fully address ongoing systemic stresses in the eurozone,” S&P said.
For those with a negative outlook, S&P warned that “we believe that
there is at least a one-in-three chance that the rating will be lowered
in 2012 or 2013.” The following is the full text of the statement by the
Standard & Poor’s Ratings Services today announced its rating
actions on 16 members of the European Economic and Monetary Union (EMU
or eurozone) following completion of its review.
We have lowered the long-term ratings on Cyprus, Italy, Portugal,
and Spain by two notches; lowered the long-term ratings on Austria,
France, Malta, Slovakia, and Slovenia, by one notch; and affirmed the
long-term ratings on Belgium, Estonia, Finland, Germany, Ireland,
Luxembourg, and the Netherlands. All ratings have been removed from
CreditWatch, where they were placed with negative implications on Dec.
5, 2011 (except for Cyprus, which was first placed on CreditWatch on
Aug. 12, 2011).
The outlooks on the long-term ratings on Austria, Belgium, Cyprus,
Estonia, Finland, France, Ireland, Italy, Luxembourg, Malta, the
Netherlands, Portugal, Slovenia, and Spain are negative, indicating that
we believe that there is at least a one-in-three chance that the rating
will be lowered in 2012 or 2013. The outlook horizon for issuers with
investment-grade ratings is up to two years, and for issuers with
speculative-grade ratings up to one year. The outlooks on the long-term
ratings on Germany and Slovakia are stable.
We assigned recovery ratings of ‘4’ to both Cyprus and Portugal, in
accordance with our practice to assign recovery ratings to issuers rated
in the speculative-grade category, indicating an expected recovery of
30%-50% should a default occur in the future.
Today’s rating actions are primarily driven by our assessment that
the policy initiatives that have been taken by European policymakers in
recent weeks may be insufficient to fully address ongoing systemic
stresses in the eurozone. In our view, these stresses include: (1)
tightening credit conditions, (2) an increase in risk premiums for a
widening group of eurozone issuers, (3) a simultaneous attempt to
delever by governments and households, (4) weakening economic growth
prospects, and (5) an open and prolonged dispute among European
policymakers over the proper approach to address challenges.
The outcomes from the EU summit on Dec. 9, 2011, and subsequent
statements from policymakers, lead us to believe that the agreement
reached has not produced a breakthrough of sufficient size and scope to
fully address the eurozone’s financial problems. In our opinion, the
political agreement does not supply sufficient additional resources or
operational flexibility to bolster European rescue operations, or extend
enough support for those eurozone sovereigns subjected to heightened
We also believe that the agreement is predicated on only a partial
recognition of the source of the crisis: that the current financial
turmoil stems primarily from fiscal profligacy at the periphery of the
eurozone. In our view, however, the financial problems facing the
eurozone are as much a consequence of rising external imbalances and
divergences in competitiveness between the eurozone’s core and the
so-called “periphery”. As such, we believe that a reform process based
on a pillar of fiscal austerity alone risks becoming self-defeating, as
domestic demand falls in line with consumers’ rising concerns about job
security and disposable incomes, eroding national tax revenues.
Accordingly, in line with our published sovereign criteria, we have
adjusted downward our political scores (one of the five key factors in
our criteria) for those eurozone sovereigns we had previously scored in
our two highest categories. This reflects our view that the
effectiveness, stability, and predictability of European policymaking
and political institutions have not been as strong as we believe are
called for by the severity of a broadening and deepening financial
crisis in the eurozone.
In our view, it is increasingly likely that refinancing costs for
certain countries may remain elevated, that credit availability and
economic growth may further decelerate, and that pressure on financing
conditions may persist. Accordingly, for those sovereigns we consider
most at risk of an economic downturn and deteriorating funding
conditions, for example due to their large cross-border financing needs,
we have adjusted our external score downward.
On the other hand, we believe that eurozone monetary authorities
have been instrumental in averting a collapse of market confidence. We
see that the European Central Bank has successfully eased collateral
requirements, allowing an ever expanding pool of assets to be used as
collateral for its funding operations, and has lowered the fixed rate to
1% on its main refinancing operation, an all-time low. Most importantly
in our view, it has engaged in unprecedented repurchase operations for
financial institutions, greatly relieving the near-term funding
pressures for banks. Accordingly we did not adjust the initial monetary
score on any of the 16 sovereigns under review.
Moreover, we affirmed the ratings on the seven eurozone sovereigns
that we believe are likely to be more resilient in light of their
relatively strong external positions and less leveraged public and
private sectors. These credit strengths remain robust enough, in our
opinion, to neutralise the potential ratings impact from the lowering of
our political score.
However, for those sovereigns with negative outlooks, we believe
that downside risks persist and that a more adverse economic and
financial environment could erode their relative strengths within the
next year or two to a degree that in our view could warrant a further
downward revision of their long-term ratings.
We believe that the main downside risks that could affect eurozone
sovereigns to various degrees are related to the possibility of further
significant fiscal deterioration as a consequence of a more recessionary
macroeconomic environment and/or vulnerabilities to further
intensification and broadening of risk aversion among investors,
jeopardizing funding access at sustainable rates. A more severe
financial and economic downturn than we currently envisage (see
“Sovereign Risk Indicators”, published Dec. 28, 2011) could also lead to
rising stress levels in the European banking system, potentially leading
to additional fiscal costs for the sovereigns through various bank
workout or recapitalization programs. Furthermore, we believe that there
is a risk that reform fatigue could be mounting, especially in those
countries that have experienced deep recessions and where growth
prospects remain bleak, which could eventually lead us to the view that
lower levels of predictability exist in policy orientation, and thus to
a further downward adjustment of our political score.
Finally, while we currently assess the monetary authorities’
response to the eurozone’s financial problems as broadly adequate, our
view could change as the crisis and the response to it evolves. If we
lowered our initial monetary score for all eurozone sovereigns as a
result, this could have negative consequences for the ratings on a
number of countries.
In this context, we would note that the ratings on the eurozone
sovereigns remain at comparatively high levels, with only three below
investment grade (Portugal, Cyprus, and Greece). Historically,
investment-grade-rated sovereigns have experienced very low default
rates. From 1975 to 2010, the 15-year cumulative default rate for
sovereigns rated in investment grade was 1.02%, and 0.00% for sovereigns
rated in the ‘A’ category or higher. During this period, 97.78% of
sovereigns rated ‘AAA’ at the beginning of the year retained their
rating at the end of the year.
Following today’s rating actions, Standard & Poor’s will issue
separate media releases concerning affected ratings on the funds,
government-related entities, financial institutions, insurance
companies, public finance, and structured finance sectors in due course.
** Market News International Washington Bureau: 202-371-2121 **