Market Overview

Moody's Downgrades Multiple EU Countries, Warns UK and France


Stock prices across Europe fell during early Tuesday trading after Moody's Investors Service downgraded the credit ratings of several European Union countries.

Moody's downgraded the credit ratings of Italy, Malta, Portugal, Slovakia and Spain and gave each of them a negative outlook as well. The credit ratings agency also warned that it might downgrade the valuable Aaa ratings of Austria, France and the United Kingdom.

Moody's said that one of the main drivers behind its actions was uncertainty over the ability of European Union member countries to implement institutional reforms of their fiscal and economic structures.

Moody's also noted that the weakening economic prospects of these countries could make it more difficult to implement unpopular austerity measures and structural reforms that are needed for them to improve their economic competitiveness.

Greece is the prime example of this concern. Greece's economy has been in recession for years, with its people being asked each year to accept more and more austerity measures in order to receive bailout funds to keep the country from defaulting on its debts.

The combination of spending cuts that include layoffs of thousands of government workers and rising taxes have not been popular during a time when most Greeks are seeing their lifestyles continually deteriorate. This has led to several nationwide strikes and protests that have often turned violent.

Moody's is concerned that protests against austerity measures in countries like Greece, Italy and Spain could lead to those countries scaling back or eliminating the reforms that are needed to reduce these countries' fiscal deficits. If a single country were to give in to public pressure and repeal its austerity measures, pressure would grow on other troubled governments to do the same.

Moody's also warned that these factors will keep market confidence down for some time to come and that any further blows to market confidence will make it more difficult and expensive for European Union countries and banks to obtain funding.

Moody's said in its press release that it "has reflected these constraints and exposures in its decision to downgrade the government bond ratings of Italy, Malta, Portugal, Slovakia, Slovenia and Spain as listed above. The outlook on the ratings of these countries remains negative given the continuing uncertainty over financing conditions over the next few quarters and its corresponding impact on creditworthiness."

Moody's went on to say that "these constraints have also prompted Moody's to change to negative the outlooks on the Aaa ratings of Austria, France and the United Kingdom. The negative outlooks reflect the presence of a number of specific credit pressures that would exacerbate the susceptibility of these sovereigns' balance sheets, and of their ongoing austerity programmes, to any further deterioration in European economic conditions and financial landscape."

While most of what Moody's had to say was negative, it did compliment the efforts of European officials to deal with the financial crisis when it said, "An important factor limiting the magnitude of Moody's rating adjustments is the European authorities' commitment to preserving the monetary union and implementing whatever reforms are needed to restore market confidence. These rating actions therefore take into account the steps taken by euro area policymakers in agreeing to a framework to improve fiscal planning and control and measures adopted to stem the risk of contagion."

While the initial reaction to news of the downgrades caused most European stock indexes to fall, they had recovered heading into afternoon trading in Europe.


Traders who believe that Moody's downgrade of several European Union countries was just telling the market what it already knew might want to consider the following trades:
  • The iShares S&P Europe 350 Index (NYSE: IEV) and the CurrencyShares Euro Trust (NYSE: FXE) ETFs could both move higher if the concerns cited by Moody's have already been priced into the market. Moody's did compliment the efforts of European Union officials, so Europe's fortunes could change in the near future.
Traders who believe that Moody's warnings to the United Kingdom, France and the other European Union countries was warranted may consider alternative positions:
  • The ProShares UltraShort Euro (NYSE: EUO) and the ProShares UltraShort MSCI Europe (NYSE: EPV) could both see their share prices move higher if Moody's warnings prove to be well deserve.
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