Standard & Poor's Takes Various Rating Actions On 16 Eurozone Sovereign Governments |
| 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
- Sovereign Government Rating Methodology And Assumptions, June 30, 2011
- Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009
- Introduction Of Sovereign Recovery Ratings, June 14, 2007
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.
Today's worst kept secret just hit the wires, as S&P announces that it has officially downgraded France
FRANCE CUT TO AA+ FROM AAA BY S&P, OUTLOOK NEGATIVE
"we believe that there is at least a one-in-three chance that we could lower the rating further in 2012 or 2013″
"we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating,"
One notch, but the negative outlook means a future downgrade is likely.
Full statement below:
France's Unsolicited Long-Term Ratings Lowered To 'AA+'; Outlook Negative
Overview
Standard & Poor's is lowering its unsolicited long-term sovereign credit rating on the Republic of France to 'AA+'. At the same time, we are affirming our unsolicited short-term sovereign credit rating on France at 'A-1+'.
The downgrade reflects our opinion of the impact of deepening political, financial, and monetary problems within the eurozone, with which France is closely integrated.
The outlook on the long-term rating is negative.
Rating Action
On Jan. 13, 2012, Standard & Poor's Ratings Services lowered the unsolicited long-term sovereign credit rating on the Republic of France to 'AA+' from 'AAA'. At the same time, we affirmed the unsolicited short-term sovereign credit rating at 'A-1+'. We also removed the ratings from CreditWatch with negative implications, where they were placed on Dec. 5, 2011. The outlook on the long-term rating is negative.
Our transfer and convertibility (T&C) assessment for France, as for all European Economic and Monetary Union (eurozone) members, is 'AAA', reflecting Standard & Poor's view that the likelihood of the European Central Bank restricting nonsovereign access to foreign currency needed for debt service is extremely low. This reflects the full and open access to foreign currency that holders of euro currently enjoy and which we expect to remain the case in the foreseeable future.
Rationale
The downgrade reflects our opinion of the impact of deepening political, financial, and monetary problems within the eurozone.
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 the political score we assign to France (see "Sovereign Government Rating Methodology And Assumptions," published on June 30, 2011). This is a reflection of our view that the effectiveness, stability, and predictability of European policymaking and political institutions (with which France is closely integrated) have not been as strong as we believe are called for by the severity of what we see as a broadening and deepening financial crisis in the eurozone.
France's ratings continue to reflect our view of its wealthy, diversified, and resilient economy and its highly skilled and productive labor force. Partially offsetting these strengths, in our view, are France's relatively high general government debt, as well as its labor market rigidities. We note the government is addressing these issues through, respectively, its budgetary consolidation strategy and structural reforms.
Outlook
The outlook on the long-term rating on France is negative, indicating that we believe that there is at least a one-in-three chance that we could lower the rating further in 2012 or 2013 if:
Its public finances deviated from the planned budgetary consolidation path. Budgetary measures announced by the French government to date may be insufficient to meet deficit targets in 2012 and 2013, should France's underlying economic growth in these years fall below the government's current forecast of 1% and 2%, respectively. If France's general government deficit were to remain close to current levels, leading to a gradual increase in the net general government debt to surpass 100% of GDP (from just above 80% currently), or if economic growth were to remain weak for an extended period, it could lead to a one-notch downgrade.
Heightened financing and economic risks in the eurozone were to lead to a significant increase in contingent liabilities, or to a material worsening of external financing conditions.
Conversely, the ratings could stabilize at current levels if the authorities are successful in further reducing the general government deficit in order to stabilize the public debt ratio in the next two to three years and in implementing reforms to support economic growth.
MS on Oil & Gas
We downgrade our Industry View to Cautious due to
1) negative outlook for Refining and Petrochemical margins, and
2) higher subsidy burden due to a weaker rupee.
-- Our top pick is Cairn India for its production growth and free cash flow
-- Avoid OMCs, Reliance and Essar due to their refining exposure
MS cuts RIL's rating to 'underweight' from 'equalweight'; Cuts price target to Rs 650 from Rs 921
MS downgrades HPCL to 'underweight' from 'equalweight'; Cuts price target to Rs 205 from Rs 407
MS downgrades Essar to 'underweight' from 'equalweight'; Cuts price target to Rs 50 from Rs 97
MS downgrades BPCL to 'underweight' from 'equalweight'; Cuts price target to Rs 418 from Rs 683
MS cuts OIL price target to Rs 1,286 from Rs 1,600; Keeps 'overweight' rating
MS raises Cairn India's price target to Rs 413 from Rs 359; Keeps 'overweight' rating
MS_Oil & Gas_Jan 13.pdf
Even before the euro crisis, people were worried about Europe's pension bomb.
State-funded pension obligations in 19 of the European Union nations were about five times higher than their combined gross debt, according to a study commissioned by the European Central Bank. The countries in the report compiled by the Research Center for Generational Contracts at Freiburg University in 2009 had almost 30 trillion euros ($39.3 trillion) of projected obligations to their existing populations.
Germany accounted for 7.6 trillion euros and France 6.7 trillion euros of the liabilities, authors Christoph Mueller, Bernd Raffelhueschen and Olaf Weddige said in the report.
"This is a totally unsustainable situation that quite clearly has to be reversed," Jacob Funk Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington, said in a telephone interview.
A recession threatening the world's second-biggest economic bloc, along with efforts to reduce debt across Europe, is exacerbating the financial risks. Stable or falling birthrates, plus rising life expectancies, are adding to pressures, with the proportion of economic output devoted to spending on retirement benefits projected to rise by a quarter to 14 percent by 2060, according to the ECB report.
Ageing Populations
Increased retirement ages and lower benefits must be part of any package to hold the 17-nation euro area together, according to analysts, including Fergal McGuinness, the Zurich- based head of Marsh & McLennan Cos.'s Mercer's pensions consulting unit for central and eastern Europe.
Europe has the highest proportion of people aged over 60 of any region in the world, and that is forecast to rise to almost 35 percent by 2050 from 22 percent in 2009, according to a report from the United Nations. That compares with a global estimate of 22 percent by 2050, up from 11 percent in 2009.
The number of people aged over 65 in the 34 countries in the Organization for Economic Cooperation and Development is forecast to more than quadruple to 350 million in 2050 from 85 million in 1970.Life expectancy in Europe is increasing at the rate of five hours a day, according to Charles Cowling, managing director of JLT Pension Capital Strategies Ltd. inLondon.
In so-called developed countries, the average lifespan will reach almost 83 by 2050, up from about 75 in 2009, the UN said.
Cutting Costs
Governments and companies have taken steps to reduce future costs with policy makers having increased retirement ages in countries, including France, Germany, Greece, Italy and the U.K.
"Irrespective of whether you're inside or outside the euro or anything else, raising retirement ages is one of the structural reforms that all of Europe has to do," Kirkegaard said. "The crisis has forced them to address this. This is actually a positive thing in many ways."
By 2060, the average French pension benefit will be 48 percent of the national average wage, compared with 63 percent now, said Stefan Moog, a researcher at Freiburg University in Freiburg, Germany.
Pension managers and governments are relying on economic growth to safeguard the promises they make. If the euro zone grows too slowly to bolster public and private coffers, theretirement plans may become unaffordable, according to Mercer's McGuinness.
Benefits' Squeeze
"The amount of money countries are going to spend on social security and long-term care is going to go up," McGuinness said in an interview. "Governments with more generous social-security systems will have difficulty affording them. They will have to recognize these costs will impact their ability to reduce borrowings."
State pension obligations in France and Germany are three times the size of their economies, according to data compiled by Mercer. It's more sustainable in France than Germany because of France's higher birthrate.
Last year, there were 4.2 people of working age for every pensioner in France. The ratio will fall to 1.9 by 2050, according to a report by Economist magazine in March. In Germany, the proportion will decline to 1.6 from 4.1 in the same period.
"That is going to put a lot of pressure on Germany's ability to meet their promises," McGuinness said. "What they are more likely to do is cut back benefits. Governments face a lot of longevity risks."
Add to Risks
Private pension funds are under pressure too with benchmark euro-area interest rates at the lowest level since the 13-year- old currency was introduced. Low rates mean pension plans have to hold more assets to back their long-term payout projections.
Unless growth returns, fund managers will effectively be forced to take on more risk, said Phil Suttle, chief economist of the Washington-based Institute of International Finance.
"That creates problems because they all head into sectors that seem a great idea now, and then they blow up, whether it's commodities or equities or whatever," Suttle said. "You're going to intensify the boom-bust cycle."
The growing doubts facing the euro area is another planning hurdle as companies reconsider investment strategies amid concerns that Greece may default on its debt and spark a broader euro breakup.
The implied probability of one country leaving the euro by the end of 2013 fell to 49 percent on Jan. 10 from 51 percent a week earlier, based on wagers at InTrade.com, an Internet betting market. The probability of one country departing by the end of 2014 is 59 percent.
Rates Benefit
Pension plans in countries such as Greece or Portugal may benefit from exiting the euro as higher interest rates that would likely accompany a return to their national currencies would cut the cost of liabilities, while assets invested abroad would almost certainly gain in value, according to Mercer, a unit of Marsh & McLennan Cos.
PensionDanmark, Denmark's seventh-largest pension fund by assets, sold all its Germangovernment bonds last year, Chief Executive Officer Torben Mogen Pedersen told reporters in Copenhagen yesterday.
"Our government debt investments are all in Scandinavian non-euro countries," Pedersen said. "We think 2012 will be a very hard year for European investors."
In Britain, which has refused to join the euro, occupational pension funds have moved the risk of ensuring adequate retirement income to the employee from the employer in the past decade to curb pension-fund shortfalls.
Funding Gap
Unfunded public-sector U.K. pension obligations across 1,500 public bodies totaled 1 trillion pounds ($1.57 trillion) in March 2010, the Treasury said Nov. 29 in the first set of audited Whole of Government Accounts. That compares with a total of 808 billion pounds of outstanding U.K. government bonds and accounts for 90 percent of all public-sector pension liabilities.
Royal Dutch Shell Plc (RDSA), Europe's largest oil company, was the last member of the benchmark FTSE 100 Index to close its defined-benefit pension plan to new entrants when it made the decision last month to do so. The company plans to introduce a fund for new employees next year that makes them responsible for ensuring they have enough to live on in old age.
Governments may have to follow the same path for their own employees as well as increasing the retirement age to at least 70 and possibly 75 to make the pensions affordable, Cowling wrote in an article published in July by Public Service Europe.
As both anecdotal, local and hard evidence of China's slowing (and potential hard landing) arrive day after day, it is clear that China's two main pillars of strength (drivers of growth), construction and exports, are weakening. As Societe Generale's Cross Asset Research group points out, China is entering the danger zone and warns that given China's local government debt burden and large ongoing deficits, a large-scale stimulus plan similar to 2008 is very unlikely, especially given a belief that Beijing has lost some control of monetary policy to the shadow banking system. In a comprehensive presentation, the French bank identifies four critical themes which provide significant stress (and opportunity): China's economic rebalancing efforts, a rapidly aging population and healthcare costs, wage inflation and concomitant automation, and pollution and energy efficiency. Their trade preferences bias to the benefits and costs of these themes being short infrastructure/mining names and long automation/energy efficiency names.
They detail their concerns about the Chinese economic outlook (weakening exports, housing bubble about to burst, local government's debt burden, and large shadow banking system), and show that China has no choice but to transition to a more consumption-driven economy leading to waning growth for infrastructure-related capital goods and greater demand for consumer-related manufacturing. Overall they see a hard-landing becoming more likely.
Weakness Has Emerged In The Property Market
And The Chinese Financing System And Construction Industry Links Have Become Increasingly Complex
Conclusion – The situation in China is worrying to say the least. Short-term indicators are weakening as past monetary tightening starts to bite and the export model is threatened once again by the risk of recession in Europe and the US. Data from the real estate industry show a significant deterioration, with a clear break in the confidence that real estate prices always go up. The debt burden of local governments and large ongoing deficits should prevent a large stimulus plan similar to that of 2008. Monetary easing could bring some relief, although we believe that Beijing lost some control of the financing system through the shadow banking.
Wikipedia, the popular community-edited online encyclopedia, will black out its English-language site for 24 hours to seek support against proposed U.S. anti-piracy legislation that Wikipedia founder Jimmy Wales said threatens the future of the Internet.
The service will be the highest profile name to join a growing campaign starting at midnight Eastern Time on Wednesday that will see it black out its page so that visitors will only see information about the controversial Stop Online Piracy Act (SOPA) and the Protect Intellectual Property Act (PIPA).
The information will urge Wikipedia readers to contact their local congressman to vote against the bills. Other smaller sites leading the campaign include Reddit.com and Cheezeburger.
"This is a quite clumsily drafted legislation which is dangerous for an open Internet," said Wales in an interview.
The decision to black out the site was decided by voting within the Wikipedia community of writers and editors who manage the free service, Wales said. The English language Wikipedia receives more than 25 million average daily visitors from around the world, according to comScore data.
The bills pit technology companies like Google and Facebook against the bill's supporters, including Hollywood studios and music labels, which say the legislation is needed to protect intellectual property and jobs.
The SOPA legislation under consideration in the House of Representatives aims to crack down on online sales of pirated American movies, music or other goods by forcing Internet companies to block access to foreign sites offering material that violates U.S. copyright laws. Supporters argue the bill is unlikely to have an impact on U.S.-based websites.
U.S. advertising networks could also be required to stop online ads, and search engines would be barred from directly linking to websites found to be distributing pirated goods.
Google has repeatedly said the bill goes too far and could hurt investment. Along with other Internet companies such as Yahoo, Facebook, Twitter and eBay it has run advertisements in major newspapers urging Washington lawmakers to rethink their approach.
White House officials raised concerns on Saturday about SOPA saying they believe it could make businesses on the Internet vulnerable to litigation and harm legal activity and free speech.
"We're happy to see opposition is building and that the White House has started to pay attention," said Wales.
News of the White House's comments prompted a prominent supporter of the bill News Corp Chief Executive Rupert Murdoch to slam the Obama administration.
"So Obama has thrown in his lot with Silicon Valley paymasters who threaten all software creators with piracy, plain thievery," he posted on his personal Twitter account Saturday. News Corp owns a vast array of media properties from Fox TV, the Wall Street Journal to Twentieth Century Fox studios.
Wales said the bill in its current form was too broad and could make it difficult for a site like Wikipedia, which he said relies on open exchange of information. He said the bill also places the burden of proof on the distributor of content in the case of any dispute over copyright ownership.
"I do think copyright holders have legitimate issues, but there are ways of approaching the issue that don't involve censorship," Wales said
