Interesting commentary from Moody's ostensibly in defense of their current ratings. Tomorrow should be a very, very interesting day.
London, 10 February 2010 -- Among the three governments -- Spain (Aaa), Portugal (Aa2) and Greece (A2) -- whose public finances are currently the focus of much market speculation, only Greece faces material challenges, says Moody's Investors Service in a new Special Comment entitled "Spain, Portugal & Greece: Contagion or Confusion?"
In the report, Moody's reiterates the need for risk differentiation among the three southern European countries. "Spain, Portugal and Greece may share the same currency, but they do not display the same credit profile," says Kristin Lindow, Senior Vice President in Moody's Sovereign Risk Group.
Moreover, Moody's new report says that concerns about the ability of the three countries to roll over their existing debt and finance their ongoing budget deficits have so far not been substantiated by hard evidence. However, Moody's acknowledges that market spreads in Spain, Portugal and Greece now suggest much larger credit risk differentiation than is indicated by their ratings. In response to these differences in perception, Moody's new report offers an assessment of the immediate liquidity risks that it believes are actually faced by the southern European sovereigns and provides the fundamental analysis underpinning its differentiated rating opinions.
The rating agency also believes that fears that the borrowings of these countries may be quantity- rather than price-constrained are exaggerated. "The attention on monthly financing needs magnifies market anxiety but under-estimates governments' financing flexibility," says Pierre Cailleteau, Managing Director of Moody's Sovereign Risk Group. Moody's believes that governments have all options at their disposal, ranging from banks providing temporary assistance with the help of the respective central bank, to funding from European Monetary Union member states or institutions -- and, in extremis, assistance from the International Monetary Fund.
Moody's considers Spain's Aaa rating to be well anchored. (A separate issuer comment was also released today describing Moody's views on Spain's medium-term fiscal consolidation strategy, entitled "Spain's Stability Programme Demonstrates Renewed Fiscal Restraint.") Meanwhile, Portugal's rating is subject to some moderate downward pressure as illustrated by the negative outlook. According to the rating agency, these situations are not directly comparable to that of Greece.