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Standard & Poor's Takes Various Rating Actions On 16 Eurozone Sovereign Governments

Publication date: 13-Jan-2012 16:36:27 EST

  • In our view, the policy initiatives taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the eurozone.
  • We are lowering our long-term ratings on nine eurozone sovereigns and affirming the ratings on seven.
  • The outlooks on our ratings on all but two of the 16 eurozone sovereigns are negative. The ratings on all 16 sovereigns have been removed from CreditWatch, where they were placed with negative implications on Dec. 5, 2011 (except for Cyprus, which was first placed on CreditWatch on Aug. 12, 2011).

FRANKFURT (Standard & Poor's) Jan. 13, 2012--Standard & Poor's Ratings 
Services today announced its rating actions on 16 members of the European 
Economic and Monetary Union (EMU or eurozone) following completion of its 

We have lowered the long-term ratings on Cyprus, Italy, Portugal, and Spain by 
two notches; lowered the long-term ratings on Austria, France, Malta, 
Slovakia, and Slovenia, by one notch; and affirmed the long-term ratings on 
Belgium, Estonia, Finland, Germany, Ireland, Luxembourg, and the Netherlands. 
All ratings have been removed from CreditWatch, where they were placed with 
negative implications on Dec. 5, 2011 (except for Cyprus, which was first 
placed on CreditWatch on Aug. 12, 2011).

. See list below for full details on the affected ratings. 

The outlooks on the long-term ratings on Austria, Belgium, Cyprus, Estonia, 
Finland, France, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, 
Slovenia, and Spain are negative, indicating that we believe that there is at 
least a one-in-three chance that the rating will be lowered in 2012 or 2013. 
The outlook horizon for issuers with investment-grade ratings is up to two 
years, and for issuers with speculative-grade ratings up to one year. The 
outlooks on the long-term ratings on Germany and Slovakia are stable. 

We assigned recovery ratings of '4' to both Cyprus and Portugal, in accordance 
with our practice to assign recovery ratings to issuers rated in the 
speculative-grade category, indicating an expected recovery of 30%-50% should 
a default occur in the future. 

Today's rating actions are primarily driven by our assessment that the policy 
initiatives that have been taken by European policymakers in recent weeks may 
be insufficient to fully address ongoing systemic stresses in the eurozone. In 
our view, these stresses include: (1) tightening credit conditions, (2) an 
increase in risk premiums for a widening group of eurozone issuers, (3) a 
simultaneous attempt to delever by governments and households, (4) weakening 
economic growth prospects, and (5) an open and prolonged dispute among 
European policymakers over the proper approach to address challenges.

The outcomes from the EU summit on Dec. 9, 2011, and subsequent statements 
from policymakers, lead us to believe that the agreement reached has not 
produced a breakthrough of sufficient size and scope to fully address the 
eurozone's financial problems. In our opinion, the political agreement does 
not supply sufficient additional resources or operational flexibility to 
bolster European rescue operations, or extend enough support for those 
eurozone sovereigns subjected to heightened market pressures. 

We also believe that the agreement is predicated on only a partial recognition 
of the source of the crisis: that the current financial turmoil stems 
primarily from fiscal profligacy at the periphery of the eurozone. In our 
view, however, the financial problems facing the eurozone are as much a 
consequence of rising external imbalances and divergences in competitiveness 
between the eurozone's core and the so-called "periphery". As such, we believe 
that a reform process based on a pillar of fiscal austerity alone risks 
becoming self-defeating, as domestic demand falls in line with consumers' 
rising concerns about job security and disposable incomes, eroding national 
tax revenues. 

Accordingly, in line with our published sovereign criteria, we have adjusted 
downward our political scores (one of the five key factors in our criteria) 
for those eurozone sovereigns we had previously scored in our two highest 
categories. This reflects our view that the effectiveness, stability, and 
predictability of European policymaking and political institutions have not 
been as strong as we believe are called for by the severity of a broadening 
and deepening financial crisis in the eurozone.

In our view, it is increasingly likely that refinancing costs for certain 
countries may remain elevated, that credit availability and economic growth 
may further decelerate, and that pressure on financing conditions may persist. 
Accordingly, for those sovereigns we consider most at risk of an economic 
downturn and deteriorating funding conditions, for example due to their large 
cross-border financing needs, we have adjusted our external score downward. 

On the other hand, we believe that eurozone monetary authorities have been 
instrumental in averting a collapse of market confidence. We see that the 
European Central Bank has successfully eased collateral requirements, allowing 
an ever expanding pool of assets to be used as collateral for its funding 
operations, and has lowered the fixed rate to 1% on its main refinancing 
operation, an all-time low. Most importantly in our view, it has engaged in 
unprecedented repurchase operations for financial institutions, greatly 
relieving the near-term funding pressures for banks. Accordingly we did not 
adjust the initial monetary score on any of the 16 sovereigns under review.

Moreover, we affirmed the ratings on the seven eurozone sovereigns that we 
believe are likely to be more resilient in light of their relatively strong 
external positions and less leveraged public and private sectors. These credit 
strengths remain robust enough, in our opinion, to neutralise the potential 
ratings impact from the lowering of our political score. 

However, for those sovereigns with negative outlooks, we believe that downside 
risks persist and that a more adverse economic and financial environment could 
erode their relative strengths within the next year or two to a degree that in 
our view could warrant a further downward revision of their long-term ratings. 

We believe that the main downside risks that could affect eurozone sovereigns 
to various degrees are related to the possibility of further significant 
fiscal deterioration as a consequence of a more recessionary macroeconomic 
environment and/or vulnerabilities to further intensification and broadening 
of risk aversion among investors, jeopardizing funding access at sustainable 
rates. A more severe financial and economic downturn than we currently 
envisage (see "Sovereign Risk Indicators", published Dec. 28, 2011) could also 
lead to rising stress levels in the European banking system, potentially 
leading to additional fiscal costs for the sovereigns through various bank 
workout or recapitalization programs. Furthermore, we believe that there is a 
risk that reform fatigue could be mounting, especially in those countries that 
have experienced deep recessions and where growth prospects remain bleak, 
which could eventually lead us to the view that lower levels of predictability 
exist in policy orientation, and thus to a further downward adjustment of our 
political score. 

Finally, while we currently assess the monetary authorities' response to the 
eurozone's financial problems as broadly adequate, our view could change as 
the crisis and the response to it evolves. If we lowered our initial monetary 
score for all eurozone sovereigns as a result, this could have negative 
consequences for the ratings on a number of countries.

In this context, we would note that the ratings on the eurozone sovereigns 
remain at comparatively high levels, with only three below investment grade 
(Portugal, Cyprus, and Greece). Historically, investment-grade-rated 
sovereigns have experienced very low default rates. From 1975 to 2010, the 
15-year cumulative default rate for sovereigns rated in investment grade was 
1.02%, and 0.00% for sovereigns rated in the 'A' category or higher. During 
this period, 97.78% of sovereigns rated 'AAA' at the beginning of the year 
retained their rating at the end of the year.  

Following today's rating actions, Standard & Poor's will issue separate media 
releases concerning affected ratings on the funds, government-related 
entities, financial institutions, insurance companies, public finance, and 
structured finance sectors in due course.

                               To                   From
Austria (Republic of)          AA+/Negative/A-1+    AAA/Watch Neg/A-1+
Belgium (Kingdom of) (Unsolicited Ratings)
                               AA/Negative/A-1+     AA/Watch Neg/A-1+
Cyprus (Republic of)           BB+/Negative/B       BBB/Watch Neg/A-3
Estonia (Republic of)          AA-/Negative/A-1+    AA-/Watch Neg/A-1+
Finland (Republic of)          AAA/Negative/A-1+    AAA/Watch Neg/A-1+
France (Republic of) (Unsolicited Ratings)
                               AA+/Negative/A-1+    AAA/Watch Neg/A-1+
Germany (Federal Republic of) (Unsolicited Ratings)
                               AAA/Stable/A-1+      AAA/Watch Neg/A-1+
Ireland (Republic of)          BBB+/Negative/A-2    BBB+/Watch Neg/A-2
Italy (Republic of) (Unsolicited Ratings)
                               BBB+/Negative/A-2    A/Watch Neg/A-1
Luxembourg (Grand Duchy of)    AAA/Negative/A-1+    AAA/Watch Neg/A-1+
Malta (Republic of)            A-/Negative/A-2      A/Watch Neg/A-1
Netherlands (The) (State of) (Unsolicited Ratings)
                               AAA/Negative/A-1+    AAA/Watch Neg/A-1+
Portugal (Republic of)         BB/Negative/B        BBB-/Watch Neg/A-3
Slovak Republic                A/Stable/A-1         A+/Watch Neg/A-1
Slovenia (Republic of)         A+/Negative/A-1      AA-/Watch Neg/A-1+
Spain (Kingdom of)             A/Negative/A-1       AA-/Watch Neg/A-1+
N.B.--This does not include all ratings affected.

Standard & Poor's will hold a teleconference on Saturday Jan. 14, 2012 at 3:00 
PM UK time. The teleconference can be accessed live or via replay and by phone 
or audio internet streaming

The call will begin promptly at 3:00 p.m. 

Passcode: 2705831 
For security reasons, the passcode will be required to join the call. 

Country        Toll Numbers            Freephone/Toll Free Number
AUSTRIA        43-1-92-80-003          0800-677-861 
BELGIUM        32-1-150-0312           0800-4-9471 
DENMARK        45-7014-0239            8088-2100 
ESTONIA                                800-011-1121       
FINLAND        106-33-149              0800-1-12771 
FRANCE         33-1-70-75-25-35        080-563-9909 
GERMANY        49-69-2222-3198         0800-101-6627 
GREECE         30-80-1-100-0674        00800-12-6609 
IRELAND        353-1-247-5274          1800-992-870 
ITALY          39-02-3601-0953         800-985-849 
LUXEMBOURG     352-27-000-1351         8002-9058 
NETHERLANDS    31-20-718-8530          0800-023-4392 
PORTUGAL                               8008-12439 
SLOVAK REPUBLIC 421-2-322-422-16           
SPAIN          34-91-414-40-78         800-098-194 
UNITED KINGDOM 44-20-7950-6551         0800-279-3590 
USA            1-210-795-1143          866-297-1588 

Call notes: This call is to be recorded for Instant Replay purposes
UK TOLL #: +44-20-7108-6279
UK TOLL FREE #: 0800-376-9027

The instant replay will start at: Jan. 14, 2012 5:30pm UKT
The instant replay will end at: Feb-14-2012 11:59pm UKT

Passcode for replay: 7498
Restrictions may exist when accessing freephone/toll free numbers using a 
mobile telephone. 

To join the event:
Conference number: 1297498
Passcode: 2705831 

To access the Audio Replay of this call, all parties can:
1. Go to the URL listed above.
2. Choose Audio Streaming under Join Events.
3. Enter the conference number and passcode. (Note that if this is a recurring 
event, multiple dates may be listed.)
Replays are available for 30 days after the live event. 

This unsolicited rating(s) was initiated by Standard & Poor's. It may be based 
solely on publicly available information and may or may not involve the 
participation of the issuer. Standard & Poor's has used information from 
sources believed to be reliable based on standards established in our Credit 
Ratings Information and Data Policy but does not guarantee the accuracy, 
adequacy, or completeness of any information used.
Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left 
column.  Alternatively, call one of the following Standard & Poor's numbers: 
Client Support Europe (44) 20-7176-7176; London Press Office (44) 
20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm 
(46) 8-440-5914; or Moscow 7 (495) 783-4009.
Primary Credit Analyst:Moritz Kraemer, Frankfurt (49) 69-33-99-9249;
Secondary Contact:Frank Gill, London (44) 20-7176-7129;

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