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More Ratings Woes in the EU

Stop us if you’ve read this before – worried about “contagion” spreading from the high-debt “PIIGS Nations,” a U.S.-based credit ratings agency has lowered the boom on the credit ratings and/or outlooks of several in said grouping as well as neighboring nations. While it may seem like a repeat, NACM assures you: it isn’t.

Moody’s Investment Services Tuesday downgraded the sovereign credit ratings of six European nations – Italy, Malta, Portugal, Slovakia, Slovenia and Spain (which fell multiple steps). Additionally, Moody’s wagged the proverbial finger at France, Austria and the United Kingdom – all holders of a prestigious ‘Aaa’ rating level – by publicly moving their respective outlooks from stable to negative.

As Moody’s and its counterparts at Fitch and Standard & Poor’s have alluded to in the past, the agency pointed to “uncertainty over the euro area’s prospects for institutional reform of its fiscal and economic framework” as well as “increasingly weak macroeconomic prospects, which threaten the implementation of domestic austerity programmes and the structural reforms that are needed to promote competitiveness.” Because of both – and, one could argue, because of the agency’s own increasing spotlight/scrutiny on debts levels in the EU – Moody’s fears the impact on market confidence and the negative cycle that could ensue.

Markets fell slightly on the news, though the announcement generated more of a yawn than the panic and/or debate such a move would have in years past. Economists, including NACM’s Chris Kuehl and The Conference Board’s Ken Goldstein, have made past comments to the tunes of “it didn’t tell markets anything they didn’t already know” or slights on the ratings agency’s own crisis in credibility it suffered after poor analysis and borderline conflicts of interest in business practices during the much discussed run-up to the global economic downturn a few years back. Still, even with less of a cache, the downgrades are likely to have some negative impact on the short-term credit prospects for the nations involved, even if the extent is yet to be established.

Brian Shappell, NACM staff writer