The rapid escalation of the sovereign debt crisis is threatening the credit rating of all European sovereign nations, warns Moody’s Investors Service.
Institutional weaknesses are continuing to hamper a recovery, despite strong economic fundamentals, according to the ratings agency.
As pressure to resolve the crisis mounts, so do the constraints governments are facing.
“The euro area is approaching a junction, leading either to closer integration or greater fragmentation,” said Moody’s in a statement.
There is mounting concern that an effective means of resolving the crisis will only emerge after a “series of shocks” that result in countries losing access to market funding.
Consequently, a number of ratings would be downgraded to “speculative grade” until the necessary solvency tests could be completed.
Although Moody’s central scenario is that the eurozone will not be subject to further defaults, the agency warns that “the likelihood of even more negative scenarios has risen”.
“The probability of multiple defaults – in addition to Greece’s private sector involvement programme – by euro area countries is no longer negligible. In Moody’s view, the longer the liquidity crisis continues, the more rapidly the probability of defaults will continue to rise,” says Moody’s.
In the absence of a decisive resolution, Moody’s says the entire framework of the agency’s rating system in the eurozone may need to be revisited.