Moody’s Warns of Possible Downgrade to Some Euro Zone Economies

The announcement follows a similar warning last week by the Standard Poor’s ratings agency, which said it could lower the credit ratings of Germany and France and cut other countries’ credit scores as a possible recession settles over the Continent and a crisis of confidence in Europe’s political management puts pressure on its banks.

S.P. is expected to announce the results of its review as soon as this week. The agency said last week that it hoped to complete its assessment “as soon as possible” after the summit.

Any downgrade in the credit rating of Europe’s governments would raise the fever of the crisis by making it more expensive for the countries to service their debts. It would make it more difficult for banks in those countries to get credit from other banks, causing a possible pullback in lending to consumers and businesses at a time when economic growth is already being squeezed.

Euro zone leaders agreed Friday to sign an intergovernmental treaty that would require them to enforce stricter fiscal discipline in their budgets, a move that addresses the euro area’s governance issues but does little to resolve current problems in the banking system and in the region’s teetering economies.

The leaders also agreed to add €200 billion, or $268 billion, to a bailout fund designed to keep the crisis from spreading.

Gary Jenkins, a strategist at Evolution Securities in London, said Monday that “high levels of debt, the rising risk of a recession and tightening credit conditions are all still with us after the summit and there was little in the way of real action to deal with any of them.”

Financial markets welcomed the plan Friday, pushing stock prices up on the Continent and on Wall Street, and Asian markets opened higher Monday. But a bigger test comes this week as investors digest whether the series agreements by the Europeans still leaves Europe vulnerable to a variety of shocks.

European markets opened lower, with major indexes trading down between 1.5 percent and 2 percent at mid-morning.

Moody’s said Monday that one of its biggest concerns was the widening growth gap between the euro zone’s weaker southern countries and their wealthier neighbors to the north.

Leaders agreed Friday to hew to a German prescription for greater austerity across the entire euro region in order to improve countries’ widening deficits and heavier debt loads. But credit markets remain volatile, and the longer that persists, the greater the risk it will weigh on governments’ efforts to repair their finances, the agency said.

“The crisis is in a critical and volatile stage, with sovereign and bank debt markets prone to acute dislocation which policymakers will find increasingly hard to contain,” the agency warned.

“Moreover, the longer the incremental approach to policy persists, the greater the likelihood of more severe scenarios, including those involving multiple defaults by euro area countries and those additionally involving exits from the euro area,” Moody’s said.

Despite clear political will to bring the euro zone under more centralized management, ratings agencies, banks and businesses are increasingly considering the possibility that countries could default or exit the currency union. Such uncertainty has caused banks worldwide to pull back on the loans they used to make freely to their counterparts in Europe. As a result, a growing number of European financial institutions have turned to the European Central Bank to obtain funding for their operations in recent weeks.

The E.C.B. last week made it easier for banks to continue such borrowing, by taking the unusual step of easing the terms and conditions of the credit it offers. But amid staunch opposition from Germany, Mario Draghi, the E.C.B. president, has not signaled that the central bank would act more aggressively to keep the borrowing costs of countries like Italy from rising by buying more of those governments’ bonds. Investors say that without such help, troubled countries would face greater resistance from financial markets.

That, in turn, would send further ripples through big European banks that hold large amounts of these governments’ bonds. Last week, the European Banking Authority said euro zone banks — including Commerzbank and Deutsche Bank of Germany — needed to raise a total of €115 billion of fresh capital by next summer to insure themselves against a worsening of the storm.

Article source: http://feeds.nytimes.com/click.phdo?i=9dca454d77d4bb94c5755f3ad37290cd