Investors shrug off 'negative' EU rating

2012-09-04 10:24

Brussels - Investors on Tuesday shrugged off Moody's decision to downgrade the outlook on the European Union's long-term AAA credit rating from stable to negative, with the euro firm and stocks mostly stable.

The ratings agency said its move reflected credit risks of the bloc's key budget contributors, including Britain, France and Germany, all of which have been slapped with negative outlooks due to the public debt crisis.

"It is reasonable to assume that the EU's creditworthiness should move in line with the creditworthiness of its strongest key member states," Moody's said.

Despite the downgrade, the euro reached a two-month high of $1.2627 in Asian trading on Tuesday, compared with $1.2598 late on Monday in London trade.

Dealers were rather keeping faith with the euro amid rising expectations that the European Central Bank (ECB) will on Thursday announce a round of sovereign debt purchases from struggling economies.

Europe's main stock markets were steady in early trading on Tuesday, with Paris CAC 40 adding 0.11% while London's FTSE 100 index lost 0.15% and Frankfurt's Dax fell 0.20%.

Moody's said its "two key rationales" for holding its highest rating for the bloc at the moment remained unchanged: its "conservative budget management" and "the creditworthiness and support provided by its 27 member states."

Britain, France, Germany and the Netherlands - which together account for about 45% of the EU's budget revenue, according to Moody's - also maintain a AAA credit rating.

However, it did not exclude the possibility of a future EU downgrade, saying in its statement that a "deterioration in the creditworthiness of EU member states" could prompt such a move.

"It is reasonable to assume the same probability of default by the EU on its debt obligations as the highest rated key members states' probability of default," Moody's said.

The agency said while there were "structural features in place that enhance the EU's creditworthiness," they were "not sufficient to delink the EU's ratings from the ratings of its strongest key member states."

"Additionally, a weakening of the commitment of the member states to the EU and changes to the EU's fiscal framework that led to less conservative budget management would be credit negative," it said.

Conversely, the bloc could regain a stable outlook for its ratings should the rating of the key triple-A budget contributors also return to stable, it added.

Michael Hewson, CMC Markets analyst called Moody's decision "a book keeping exercise, more than any change in perception about the EU's financial position."

"It brings it into line to reflect the negative outlooks to the main contributors to the EU budget," he noted, adding however that it highlights concerns about debt sustainability and growth prospects of these main EU contributors.

In July, Moody's lowered the ratings outlook of Germany, Luxembourg and the Netherlands to negative, saying the "level of uncertainty about the outlook for the euro area" was no longer consistent with stable outlooks for the countries.

France and Austria have been under a negative ratings outlook since February, and Britain was assigned the same status in December.

Greece is trying to renegotiate terms of its second bailout, while Spain is under pressure to also request bailout aid after accepting help to recapitalise its broken banking system.

Struggling economies such as Spain, Italy and Portugal are desperate for help to push down their borrowing costs and hope they will receive some good news later in the week.

ECB chief Mario Draghi on Monday defended controversial measures to tame the eurozone debt crisis, including purchases of government debt.

Members of the European Parliament said Draghi, widely expected to announce further details on Thursday of how the ECB will ease the pressure on struggling eurozone states, told them that the central bank had a responsibility to intervene when necessary.

Draghi, who made no public comment, said that buying government securities of up to 3-year maturities on the secondary market did not amount to bailing out spendthrift euro members - a charge levelled by some German politicians.

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