European Ratings Tour

So lets review the week in European credit ratings (all via Moodys):

Moody's Investors Service has today downgraded Ireland's foreign- and local-currency government bond ratings by five notches to Baa1 from Aa2. The outlook on the Baa1 rating is negative. Today's rating action concludes the review for possible downgrade that Moody's had initiated on 5 October 2010.

Moody's negative outlook on the ratings of the government of Ireland is based on our forward looking view on the risk that the Irish government's financial strength could decline further if economic growth were to be weaker than currently projected or the costs of stabilizing the banking system turn out to be higher than currently forecast.

Moody's has today also downgraded Ireland's short-term issuer rating to Prime-2 (commensurate with a Baa1 debt rating) from Prime-1. Ireland falls under the Eurozone's Aaa regional ceilings for bonds and bank deposits, which are unaffected by the Irish government's downgrade.

Should Ireland's adjustment capacity prove to be insufficient to stabilize debt metrics in the foreseeable future, a further rating downgrade would follow. Moody's will closely monitor the specific measures taken by the government as part of the fiscal consolidation plan. Moreover, a severe deterioration in the country's debt metrics in the event of ongoing support needs for the banking system would exert further downward pressure on the rating. Finally, Moody's will also be monitoring the evolution of plans for the long-term support mechanism under discussion within the EU to determine whether there are any developments that might undermine its external support assumptions.

Then on to Greece

Moody's Investors Service has today placed Greece's Ba1 local and foreign currency government bond ratings on review for possible downgrade. Greece's country ceilings for bonds and bank deposits are unaffected by the review and remain at Aaa (in line with the Eurozone's rating).

Moody's decision to initiate this review was prompted, despite significant progress in implementing a very large fiscal consolidation effort, by the increased uncertainty over (1) Greece's ability to reduce its debt to sustainable levels given the recent substantial upward revision in debt levels; (2) the substantial revenue shortfall that we have observed in 2010; and (3) the level and conditions of ongoing support that would be available to Greece in the event that its market access remains cut off. Therefore, Moody's review will focus on the factors, namely nominal growth and fiscal consolidation, that will drive the country's debt dynamics over the next few years. It will also consider implementation risk, which appears to be particularly high in 2011 for both political and administrative reasons.

Moody's says that a multi-notch downgrade would be possible if it concludes that there is an increased risk that Greece's debt-to-GDP ratio will fail to stabilize in the next three to five years, or that there is a greater risk that EU support will turn out to be less strong after 2013 than the rating agency had previously assumed.

And Up to Spain:

Moody's Investors Service has today placed Spain's Aa1 local and foreign currency government bond ratings on review for possible downgrade.

The main triggers for placing the rating on review for possible downgrade are:

(1) Spain's vulnerability to funding stress given its high refinancing needs in 2011. This vulnerability has recently been amplified by fragile market confidence.(2) A potential further increase in the public debt ratio should the cost of bank recapitalisation prove to be higher than expected so far, whether to meet higher-than-expected asset impairments or simply to retain the confidence of the wholesale markets.  (3) Increased concerns over the ability of the Spanish government to achieve the required sustainable and structural improvement in general government finances given the limits of central government control over the regional governments' finances.

"Moody's believes that the above-mentioned downside risks warrant putting Spain's rating under review for downgrade", says Ms Muehlbronner, Moody's Vice President and lead analyst for Spain. "However, Moody's also wants to stress that it continues to view Spain as a much stronger credit than other stressed Euro zone countries. This is reflected in the significantly higher rating for the Spanish sovereign. Moody's review will therefore most likely conclude that Spain's rating will remain in the Aa range." 

Bottom line:  If things don't get better, if mechanisms that are believable aren't put in place - its gonna get worse.  Banks and sovereigns are intertwined, watch the banks.  BIS put out a report yesterday on BASEL III impact on capital ratios and liquidity, worth a read as it will give a framework for understanding how this is all going to shake out and the amount of capital still needed.  


I would be on the sidelines, waiting for an opportunity to jump in cheaper.  Keep your eye on STD as well.  Euro cant hold until this stabilizes but volatility will bring trading opportunities.