Moody's cuts ratings on Italy, Portugal and Spain, Warns UK, France and Austria: Is it Time for a Reality Check?

Moody’s has cut the debt ratings of Italy, Spain and Portugal and put France, the UK and Austria on alert, saying they are increasingly vulnerable to the eurozone crisis.

Moody’s also cut its ratings on the smaller nations of Slovakia, Slovenia and Malta. All nine countries are members of the European Union. Moody's actions can be summarized as follows:

Austria: outlook on Aaa rating changed to negative
France: outlook on Aaa rating changed to negative
Italy: downgraded to A3 from A2, negative outlook
Malta: downgraded to A3 from A2, negative outlook
Portugal: downgraded to Ba3 from Ba2, negative outlook
Slovakia: downgraded to A2 from A1, negative outlook
Slovenia: downgraded to A2 from A1, negative outlook
Spain: downgraded to A3 from A1, negative outlook
UK: outlook on Aaa rating changed to negative

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A negative outlook means Moody’s sees at least a 40 percent chance that it could downgrade a country’s rating over the next 18 months. The negative outlooks are indicative of the presence of a number of specific credit pressures that would aggravate the vulnerability of these sovereigns' balance sheets and their ongoing austerity programmes.

Moody's has noted that main drivers of these actions are, first of all, uncertainty over the eurozone's prospects for institutional reform of its fiscal and economic framework and the resources that will be made available to deal with the crisis. Secondly there are Europe's increasingly weak macroeconomic prospects, which threaten the implementation of domestic austerity programmes and the structural reforms that are needed to promote competitiveness.

"To a varying degree, these factors are constraining the creditworthiness of all European sovereigns and exacerbating the susceptibility of a number of sovereigns to particular financial and macroeconomic exposures," it stated.

Moody’s moves were less severe than those taken last month by rival ratings agency Standard & Poor’s, which downgraded nine European countries, including stripping France and Austria of their AAA status.

At the same time Moody's has left an optimistic note. It expects European policy makers to move ahead with economic reforms and does not foresee any government losses on bailout loans. "We continue to believe that the euro area as a whole possesses considerable economic and financial strength, with its creditworthiness constrained by its institutions and by a legacy of fiscal imbalances rather than by its access to resources," Moody’s said.

The rating agency considers the ratings of the following European sovereigns to be appropriately positioned, namely, Denmark (Aaa), Finland (Aaa), Germany (Aaa), Luxembourg (Aaa), Netherlands (Aaa), Sweden (Aaa), Belgium (Aa3), Estonia (A1) and Ireland (Ba1).

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