Moody's: European Bailouts Pose No Threat to Debt Ratings

With the exception of Iceland, the measures taken by European governments to support banks do not pose a threat to their sovereign debt ratings, according to Moody’s.

To date, the responses to the credit crisis have included full nationalizations, capital injections, firm declarations of support and formal blanket guarantees. Other initiatives are possible given the continued fluidity of the situation. In addition, a reshaping of EU-wide financial stability arrangements is now being considered as a matter of urgency, and a relaxation of the Maastricht budget rules is increasingly probable.

With the exception of Iceland, where the unprecedented seizing up of global credit markets has compounded the difficulties of Icelandic banks and considerably complicated the task of the government to restore financial stability, Moody’s response has so far been very measured.

“Our view is that, in most cases, the rescues do not involve outsized and/or immediate debt increases, and remain manageable within the respective government’s current rating category. Government balance sheets are not yet materially affected, while less prompt reaction to protecting banking systems could have durably weakened the countries’ economic strength, upon which the governments’ taxing power is based.”

“That is why it is Moody’s view at this stage that European governments are taking calculated risks with public finances with the ultimate aim of protecting the vitality of their respective economies.”

In a Special Comment, Moody’s says the nature of the rescue operations poses a number of complicated questions. “In particular, three considerations require heightened vigilance. Firstly, the crystallisation of contingent liabilities at the current scale is a process that is difficult to control. Secondly, the deleveraging that will probably result from the current dislocations will deepen the downturn in many countries. Thirdly, the relaxation of budgetary rules will add uncertainty with regard to the medium-term orientation of public finances, although Maastricht ceilings have never played a critical role in Moody’s assessment of governments’ creditworthiness.”