Default a remote possibility within troubled eurozone, says Moody's
Published 23/12/2010 | 05:00
A debt default by a eurozone country is a "remote possibility", ratings agency Moody's said yesterday.
Separately, some London analysts gave a one-in-five chance of a member state leaving the euro in the next five years, although a complete break-up was seen as unlikely.
In a special report on the creditworthiness of stressed eurozone countries, Moody's argued that all countries in the eurozone benefit from the strength of the core countries and institutions, which makes a sovereign default a remote possibility.
"The key decision-makers agree that even one sovereign debt default or restructuring would give rise to intolerable contagion effects, potentially eliminating market access for a number of other eurozone sovereigns and their banking systems," the report said.
"Therefore, we believe liquidity support will be available to eurozone sovereigns and their banking systems as long as market confidence remains challenged."
Moody's said it saw very little risk in the medium term of a default by Ireland or any other eurozone economy, although Greece was a possible exception.
Some analysts queried the timing of the publication. "It raises the question of whether Moody's is trying to flatter eurozone leaders ahead of planned changes to the regulation of agencies next month," said Gary Jenkins of Evolution Securities.
Last month, the European Commission, in a consultation document, noted that downgrades by the agencies "have the immediate effect of making a country's borrowing more expensive".
Economists at consultancy IHS Global Insight said the risk of a euro member leaving the single currency next year was only about 7pc, because EU leaders would use as many resources as necessary to prevent a break-up.
But the probability of any one country leaving the euro region in the next five years was 20pc, the note to clients from IHS analysts in several EU financial centres said.
"A break-up would unravel decades of European political and economic integration and severely damage the common market.
"Confronted with this risk, Europe will marshal huge political efforts and resources to prevent a breakup, as no economic argument can supersede the political objective," they said.
If there were a breakup, the catalyst might be political and social upheaval that led to the rejection of policy reforms and agreements in EU/IMF bailouts.
Ratings agency Fitch said yesterday that Greek government bonds could be downgraded below the level at which most financial funds are allowed to invest -- otherwise known as "junk". A downgrade may come within six weeks after a review of Greece's "fiscal sustainability", Fitch said.
Public transport workers in Athens are striking for the fourth day this month to protest against wage cuts.
Greece already has non-investment grade rankings from Moody's and Standard & Poor's.