Europe Feels Effects of Credit Crunch

Moody's report notes 35 issuer downgrades there in Q1, double the number of upgrades.
Stephen TaubApril 29, 2008

The global credit crunch is clearly taking a toll on European companies.

In the first quarter of 2008, Moody’s Investors Service downgraded 35 issuers in Europe and upgraded only 17. The gap of downgrades to upgrades was the worst since the third quarter of 2006, when the ratings gap was at minus 20, according to the rating agency.

In addition, the 12-month rolling share for review upgrades dropped to 27 percent from 31 percent the previous quarter.

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The rise of reviews for possible downgrades affected both investment- and speculative-grade issuers.

“Uncertainty about the U.S. recession, nervous financial markets, higher input costs for business (especially oil), and an appreciating euro are restraining the euro zone economy,” Moody’s noted in a new report focused solely on Europe.

Moody’s also expects the financial sector credit crunch to have a greater and more prolonged impact on the non-financial sector, as tight monetary conditions pass-through to the real economy. “Credit quality will continue to worsen in Western Europe,” it added.

Interestingly, credit quality for Eastern European issuers remained stable in the first quarter.

There were a total of eight upgrades and just one downgrade. “The stable nature of the Eastern European issuers suggests the Eastern European borrows have so far been immune to the current credit crisis that has engulfed the Western European financial sector,” Moody’s said.

Moody’s is also fairly upbeat about the Euro zone economy looking to the rest of this year, and into 2009. It expects growth to moderate but still remain relatively robust this year.

The rating agency explained that it expects that inflationary pressures will occur in the first half of the year, but that they will ease sufficiently in the second half to help persuade the European Central Bank to start lowering its benchmark rate.

The Central Bank is expected to leave its main policy rate on hold at 4 percent as long as inflation stays above 3 percent. Therefore, Moody’s does not expect a 25 basis point interest rate cut until September.