Moody's Investors Service downgraded six European nations and became the first ratings firm to warn the U.K.'s rating could be at risk, citing the area's weakening ability to implement measures aimed at reducing debt.
The ratings firm's actions follow similar moves by Standard & Poor's and Fitch Ratings last month where multiple downgrades were made all at once. Like S&P and Fitch before it, Moody's said concerns with the debt crisis, how it is being handled and the impact on the region's various economies were at the heart of the downgrades.
Moody's also noted the fragility of financial markets in Europe and the possibilities of future shocks to the system because of the crisis. The company previously said late last year it would review ratings broadly on European Union members, including those in the union that don't use the common currency.
Where Moody's did deviate from recent actions by other ratings firms was in changing the outlook for the U.K. There had been no indication the U.K.'s outlook was necessarily in danger based on how other ratings firms view U.K.'s debt. Both S&P and Fitch have a stable outlook on their U.K. rating.
U.K. Chancellor of the Exchequer George Osborne said the negative outlook is proof that Britain can't waver from its plans to deal with the country's debt. He said the rating firm was explicit that only thing stopping an immediate downgrade of the U.K. was the government's fiscal-consolidation plan.
"This is a reality check for anyone who thinks Britain can duck confronting its debt," Mr. Osborne said.
Since coming to office 18 months ago, the U.K.'s coalition government has embarked on an ambitious austerity plan in which it will instigate an additional £107 billion ($168.7 billion) of spending cuts and tax increases by 2015.
Mr. Osborne has steadfastly stuck to the plan—despite repeated calls from opposition lawmakers, unions and some economists to soften the pace of the spending cuts—saying changing course would cause the U.K. to lose credibility with investors. Mr. Osborne on Monday highlighted the fact that Moody's said any reduction in the political commitment to fiscal consolidation could lead to a rating downgrade.
Moody's said the main driver for placing the U.K. on negative outlook was the weaker macroeconomic environment, which it said will challenge the government's efforts to place its debt burden on a downward trajectory over the coming years.
"A combination of a rising medium-term debt trajectory and lower-than-expected trend economic growth would put into question the government's ability to retain its AAA rating," Moody's said. "The U.K.'s outstanding debt places it amongst the most heavily indebted of its AAA-rated peers, alongside the United States and France whose AAA ratings also carry a negative outlook."
The U.K.'s borrowing costs have fallen to historic lows in recent months—a factor the government cites as validation for its austerity measures. However, Moody's said while the U.K. currently enjoys "haven" status, there was also a growing risk that the weaker macroeconomic outlook could damage market confidence in the government's fiscal consolidation program and cause funding costs to rise.
Moody's decision to place the U.K. on negative outlook was largely unexpected, as there had been no indication the U.K.'s outlook was necessarily in danger based on how other ratings firms view U.K.'s debt. Moody's also changed to negative the outlook for the Bank of England's triple-A credit, in line with the change of outlook on the U.K.'s sovereign rating.
The ratings firm downgraded Italy a notch to A3, which is four rungs above speculative-grade territory, and maintained a negative outlook on the euro-zone's third-biggest economy. Malta, Portugal, Slovenia and Slovakia also received one-notch downgrades and still have negative outlooks, Moody's said. Spain was downgraded two notches. Each of those six countries was downgraded by S&P last month. Fitch downgraded Italy, Slovenia and Spain last month.
While Moody's might have been the last to act, it was the most severe on Portugal and Spain. Among the three biggest ratings firms, Moody's now has the lowest rating on each of those countries.
Concerns over Portugal's debt problems have mushroomed in recent weeks, sending its bond yields to record highs. Moody's downgrade of Portugal sends the country's rating further into junk territory at Ba3, which is three notches below investment grade.
Moody's didn't go as far as S&P when it came to two top-rated euro-zone members, France and Austria. Moody's simply lowered their outlooks to negative, while S&P downgraded each of those countries.
An outlook indicates a longer time horizon, of about two years, in which a ratings action could take place. The maintenance of triple-A ratings from both Fitch and Moody's should alleviate some of the potential pressure on those two countries. Typically investors tied to minimum ratings requirements to hold debt will look to see where the majority of the big three rate debt, so France and Austria maintaining triple-A ratings at Moody's means two of three ratings firms still see them as top-notch investments.
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