Standard & Poor’s Ratings Services has issued an FAQ explaining its downgrades of nine eurozone sovereigns and affirmations of the ratings of seven others.
S&P lowered the long-term ratings on Cyprus, Italy, Portugal, and Spain by two notches; lowered the long-term ratings on Austria, France, Malta, the
Slovak Republic, and Slovenia, by one notch; and affirmed the long-term
ratings on Belgium, Estonia, Finland, Germany, Ireland, Luxembourg, and the Netherlands.
The outlooks on long-term ratings on all but two of the 16 eurozone sovereigns are negative; the outlooks on the long-term ratings on Germany and Slovakia are stable. See Standard & Poor’s Takes Various Rating Actions On 16 Eurozone Sovereign Governments, published today for full details.
This report addresses questions that S&P anticipates market participants might
ask in connection with our rating actions today.
WHAT HAS PROMPTED THE DOWNGRADES?
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:
- tightening credit conditions,
- an increase in risk premiums for a widening group of eurozone issuers,
- a simultaneous attempt to delever by governments and households,
- weakening economic growth prospects, and
- 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 market pressures.
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 EMU’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 addition to our assessment of the policy response to the crisis, downgrades
in some countries have also been triggered by external risks. 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.
For details, see the full report Credit FAQ: Factors Behind Our Rating Actions On Eurozone Sovereign Governments
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