Moody’s: can’t rule out more euro zone ratings cuts

LONDON (Reuters) – Further sovereign ratings downgrades for euro zone countries cannot be ruled out as new measures announced by the EU last week are insufficient to resolve the debt crisis, Moody’s Investors Service said on Thursday.

While the measures confirmed European Union policymakers’ commitment to help provide an effective liquidity backstop for countries facing funding difficulties, the key issue for stressed countries remained their uncertain solvency profile, Moody’s said in a statement.

“Given these developments, our sovereign ratings in the euro area will be driven by three assumptions that were confirmed by Friday’s announcements: the lack of solvency support, the distinct possibility of debt restructurings and other forms of sovereign default, and our expectation of a continued difficult funding environment,” it said.

The absence of fiscal transfer mechanism and the conditions under which assistance would prospectively be made available left downside risk to private creditors, Moody’s said.

The announced support framework was based on a fragile political consensus which has developed along a very unpredictable path, it said.

“As a result, we expect funding stress to continue for many EU sovereigns. If the cost of borrowing continues to rise and medium-term projected debt affordability metrics decline, further downward rating actions may be warranted.”

Earlier this month, Moody’s downgraded Spain’s ratings to Aa2, Portugal to A3, Ireland to Baa1 and Greece to B1. Its outlooks on the four peripheral euro zone countries remained negative, it said.

It said the EU announcements last week did not meaningfully increase the flexibility of the EU’s European Financial Stability Facility/European Stability Mechanism. The EFSF/ESM may purchase the bonds of member governments in their primary debt markets but not in the secondary market or bond buybacks.

(Reporting by Emelia Sithole-Matarise; Editing by Toby Chopra)

Moody’s: can’t rule out more euro zone ratings cuts