...if the same warnings were given two years ago. Like the sirens in action films being audible *just* in time for the final credits to start rolling.
While Moody’s central scenario remains that the euro area will be
preserved without further widespread defaults, even this ‘positive’
scenario carries very negative rating implications in the interim period.
The rating agency notes that the political impetus to implement an
effective resolution plan may only emerge after a series of shocks, which
may lead to more countries losing access to market funding for a
sustained period and requiring a support programme. This would very
likely cause those countries’ ratings to be moved into speculative grade
in view of the solvency tests that would likely be required and the
burden-sharing that might be imposed if (as is likely) support were to be
needed for a sustained period.
However, over the past few weeks, the likelihood of even more negative
scenarios has risen. This reflects, among other factors, the political
uncertainties in Greece and Italy, uncertainty around the final haircut
imposed on holders of Greek debt, the emphasis in the recent Euro Summit
statement on the conditional nature of the existing support programmes
and the further worsening of the economic outlook across the euro area.
Alternative outcomes fall into two broad categories: those involving one
or more defaults by euro area countries (in addition to Greece’s PSI
programme); and those additionally involving exits from the euro area.