moody’s

The night before a government debt auction, Moody’s concluded its review of Portugal with a two notch cut to their credit rating, which now stands at A3. The rating agency also left the sovereign issuer with a negative outlook, implying further downgrades are likely within two years if there is no improvement.

According to central bank forecasts, the economy will contract by 1.3 per cent this year, pushing Portugal into its second recession in three years. Citing subdued growth prospects and high borrowing costs, Moody’s actions might aggravate both issues today. Portugal is aiming to raise up to €1bn in 12-month Treasury Bills at auction and yields in the secondary market – an indication of the government’s cost of debt at auction – have risen this morning and remain near record highs

Moody’s rating agency has just downgraded Greece’s government bonds to B1 from Ba1, placing the debt on negative outlook, meaning further downgrades are likely. The move takes Greek debt from borderline junk to “highly speculative” territory.

Fitch and S&P still rate Greek debt three notches higher at BB+ (the equivalent of Ba1, Moody’s previous rating), but this might not last long. Fitch last downgraded on January 14 and has a negative outlook on the rating, while S&P last downgraded in December but has the rating on credit watch negative (meaning a downgrade is imminent, if there is no material improvement). 

James Politi

The US is little more than $200bn away – or about 2 months – away from reaching its congressionally mandated national debt limit of $14,300bn.

The need to increase it to avoid a potentially disastrous US default is the next fiscal battleground in Washington, after the lawmakers stop squabbling over a government shutdown.

Republicans want to use the opportunity to push for more spending cuts, while Democrats say this is not the place to negotiate.

On Thursday, Moody’s Investors Service offered its analysis of the likelihood that a major crisis will ensue, threatening America’s triple-A credit rating much earlier than even the most ardent fiscal hawks would imagine. 

Lisbon might soon have more difficulty accessing debt through the markets, precisely because Moody’s is worried that it will. With rather circular reasoning, Moody’s said it was placing Portugal’s A1 rating on downgrade review because of “concerns about Portugal’s ability to access the capital markets at a sustainable price”. Yields will no doubt rise further on the news.

Moody’s is also worried about the effect of bank support on the government’s debt, as well as the impact of austerity measures. The rating looks perilous, then, since Moody’s fears will rise whether Portugal cuts or spends. 

It jumped last but – not to be outdone – Moody’s has slashed five notches off its Ireland rating, taking it to Baa1 (which is equivalent to Fitch’s BBB+ and about three notches above junk). They’ve also slapped a negative outlook on it, meaning a further downgrade is likely in the next two years if there is no improvement. A multi-notch downgrade was likely – the ratings agency said so itself – though it has come relatively late in the game, after similar cuts by S&P and Fitch.

S&P now offers Ireland the highest rating at A, two notches above Fitch and Moody’s. Under the original ECB collateral requirements of A-, this would mean Ireland’s bonds could still be used – just – as collateral at the central bank. As it is, the “temporary” lowering of collateral requirements to BBB- is still in force, so Ireland need not worry. (As with Greece, the ECB would probably make an exception for Ireland even if its ratings were cut below this level.) 

S&P jumped first, but Fitch has jumped further: the ratings agency has just knocked three notches off its credit rating for Ireland, placing the outlook at stable. Fitch’s rating is down to BBB+ from A-. S&P cut its rating two notches from AA- to A on November 24. Fitch is now two notches below S&P.

Moody’s, which has threatened a multi-notch downgrade, is again the last mover. Its rating remains at AA. So – for now – the chance of an Irish default is roughly equal to that of Russia or Japan, depending which rating agency you follow. This is likely to be temporary: Moody’s will probably join Fitch in a three- or even four- notch downgrade within a couple of weeks.

Moody’s isn’t going to get caught out this time. The ratings agency has said today that its review of Irish sovereign debt is likely to end in a multi-notch downgrade. If we take “multi” to mean three or more, the current Aa2 rating will probably end up below those of S&P and Fitch.

Curious timing. All three agencies have stayed mute about Ireland in recent weeks. S&P and Fitch are yet to say anything and Moody’s has waited for the announcement of the aid package.

Perhaps there were burnt fingers over Greece. In the Spring, S&P and Fitch downgraded Greece as market fears intensified, adding to the commotion and leaving Moody’s in a very awkward place (had they downgraded Greece, they might single-handedly have disqualified Greek assets from being accepted as collateral at the ECB).

Rating agencies were heavily criticised for aggravating matters in April and May, 

Ewald Nowotny yesterday described as “unacceptable” the power of Moody’s to determine the fate of Greece, and possibly Europe with it. Moody’s has just replied – by denying it holds such power.

The ECB usually requires more than  A- rating on financial products used as collateral. This was lowered temporarily to BBB- during the crisis, a reduction expiring at the end of this year. Standard and Poor’s and Fitch have since downgraded Greek sovereign debt to BBB+, meaning they would not qualify as ECB collateral when the rating requirement changes back. Only Moody’s has kept a rating that would allow Greek debt to qualify. 

Reaction to Greece’s proposed austerity package will be all important. Greece will ask the ECB to assess the plan, Bloomberg reported earlier. And the sooner, the better, for market stability. Approvals, if and when they come, will reassure investors that words will translate to actions.

In the interim, Moody’s has given cautious approval by affirming its A2 (Neg) rating. 

Moody’s is ‘cautiously optimistic’ for the continued recovery of Middle East sovereigns (although this excludes the Dubai government, which is not rated by the ratings agency).

A sluggish global recovery will gain momentum and investor confidence will rebuild, predicts Moody’s Investors Service. So far this year, all Middle East ratings changes have been upward (Oman – Feb 18, Saudi Arabia – Feb 15). Moody’s points out that the region suffered a ‘relatively mild’ crisis.