Standard & Poor's Takes Various Rating Actions On 16 Eurozone Sovereign Governments
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| Publication date: 14-Jan-2012 05:36:27 HKT |
- In our view, the policy initiatives taken by European policymakers in
recent weeks may be insufficient to fully address ongoing systemic
stresses in the eurozone.
- We are lowering our long-term ratings on nine eurozone sovereigns and
affirming the ratings on seven.
- The outlooks on our ratings on all but two of the 16 eurozone sovereigns
are negative. The ratings on all 16 sovereigns 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).
FRANKFURT (Standard & Poor's) Jan. 13, 2012--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).
. See list below for full details on the affected ratings.
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 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 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.
RELATED CRITERIA
RELATED RESEARCH
- Standard & Poor's Puts Ratings On Eurozone Sovereigns On CreditWatch With
Negative Implications, Dec. 5, 2011
- Trade Imbalances In The Eurozone Distort Growth For Both Creditors And
Debtors, Says Report, Dec. 1, 2011
- Standard & Poor's RPM Measures The Eurozone's Great Rebalancing Act, Nov.
21, 2011
- Who Will Solve The Debt Crisis?, Nov. 10, 2011
- Ireland's Prospects Amidst The Eurozone Credit Crisis, Nov. 29, 2011
RATINGS LIST
To From
Austria (Republic of) AA+/Negative/A-1+ AAA/Watch Neg/A-1+
Belgium (Kingdom of) (Unsolicited Ratings)
AA/Negative/A-1+ AA/Watch Neg/A-1+
Cyprus (Republic of) BB+/Negative/B BBB/Watch Neg/A-3
Estonia (Republic of) AA-/Negative/A-1+ AA-/Watch Neg/A-1+
Finland (Republic of) AAA/Negative/A-1+ AAA/Watch Neg/A-1+
France (Republic of) (Unsolicited Ratings)
AA+/Negative/A-1+ AAA/Watch Neg/A-1+
Germany (Federal Republic of) (Unsolicited Ratings)
AAA/Stable/A-1+ AAA/Watch Neg/A-1+
Ireland (Republic of) BBB+/Negative/A-2 BBB+/Watch Neg/A-2
Italy (Republic of) (Unsolicited Ratings)
BBB+/Negative/A-2 A/Watch Neg/A-1
Luxembourg (Grand Duchy of) AAA/Negative/A-1+ AAA/Watch Neg/A-1+
Malta (Republic of) A-/Negative/A-2 A/Watch Neg/A-1
Netherlands (The) (State of) (Unsolicited Ratings)
AAA/Negative/A-1+ AAA/Watch Neg/A-1+
Portugal (Republic of) BB/Negative/B BBB-/Watch Neg/A-3
Slovak Republic A/Stable/A-1 A+/Watch Neg/A-1
Slovenia (Republic of) A+/Negative/A-1 AA-/Watch Neg/A-1+
Spain (Kingdom of) A/Negative/A-1 AA-/Watch Neg/A-1+
N.B.--This does not include all ratings affected.
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