RATING AGENCY:THE RAPIDLY escalating crisis in the euro zone is threatening the standing of all the region's governments as their ability to raise capital in the markets is increasingly questioned, Moody's, the US rating agency, warned yesterday.
The agency fears policymakers will not be able to move swiftly enough to stem the deepening crisis, particularly in a week with a series of important bond auctions that will test investor sentiment and put the European Central Bank (ECB) under greater pressure to intervene further.
It adds that the probability of sovereign defaults is “no longer negligible” and a series of defaults would significantly increase the likelihood of countries leaving the euro zone.
While Moody’s central scenario remains that the single currency bloc will be preserved without widespread defaults, the agency warned that any country requiring support for a sustained period was likely to be downgraded to speculative, or “junk” status.
Market participants said this was a warning to Italy, which many see as close to needing a bailout as its government bond yields trade above 7 per cent for 10-year paper, a level that is seen as being unsustainable in the long run.
The agency also said a “series of shocks” may be uncomfortably close because of the large amount of euro zone government bond supply in the next few days.
One trader said: “This is certainly a crunch week. We are seeing more ECB intervention today and I think they are the only thing that is just about keeping this market’s head above water.”
Belgium and Italy managed to issue bonds yesterday but both saw extremely high yields that suggest these two countries are on an unsustainable debt path.
Belgium sold just under €2 billion in bonds with a 10-year offering pricing at yields of 5.66 per cent. Italy sold €567 million of inflation-linked bonds to mature in 2023 at a real yield (after inflation is taken into account) of 7.3 per cent. Italy also had to scale back the size of the offering from €750 million.
However, despite the Moody’s report and the gloom surrounding the euro zone, yields of Italy, Belgium and Spain fell. These countries are considered most likely to be the next into the emergency unit after Portugal, Ireland and Greece, which are already reliant on bailout loans.
Market participants said the reason for falling yields was in part due to ECB intervention and also because the Moody’s warnings had been priced in after last week’s turbulence – in particular, a poorly received German bond auction. – (Copyright The Financial Times Limited 2011)
