In Q3 2008, the total solvency of the western European companies kept falling due to fast deterioration of the situation in the financial sector, Moody’s Investors Service, an international rating agency, said in its European Credit Trends Q3 2008 â€“ Special Comment.
Most of the largest economies in the region either have entered the recession or are moving towards this. In spite of fall of official interest rates and extensive governmental support to the financial sector, Moodyâ€™s expects the European economy to experience serious shocks in middle-range outlook.
In Q3 2008, Moodyâ€™s decreased the ratings of 52 liability issuers and increased the ratings of 15 issuers. Thus, the gap between the number of increases and decreases totalled -37, which was the worst result since the Q1 2003 (-48).
Moodyâ€™s economist Christine Lee said that given the preservation of high inflation rate in the European Zone, the European Central Bank had to leave without change the current rates in Q3 instead of decreasing them so that to maintain the growth. Combination of the factors exerted a ponderable influence on the fundamental credit indices of the western European issuers. As a result, the profitability of non-financial companies decreased, he said.
Despite the efforts of the governments to restore the liquidity and the trust of investors to the capital markets, Moodyâ€™s does not believe these measures will prevent the economy of the European countries from recession.
Moodyâ€™s report said the credit crisis has also swept European countries with developing economies who demonstrated stability against its impact earlier.
â€œRates of inter-bank credits in the Central and Eastern Europe sharply increased which will cause rise in interest rates and suspension of access of physical persons and populations to crediting. It put additional reducing pressure on growth rates,â€ Moodyâ€™s economist Kimberlee Forks said. Moodyâ€™s said, however, solvency of issuers with ratings of speculative class continues to display stability against economic recession. In Q3, rating awarded by Moodyâ€™s in this segment, dropped not often and went up frequently than in Q2. So, negative value of a gap between ratings fell from 14 to 5.
â€œThe major reason behind fundamental crediting indicators of these issuers appearing to be higher than was anticipated is the presence of sharper covenants on credits attracted by issuers before financial crisis began,â€ Lee said.
Some issuers also took advantage of opportunities to re-finance their debts and extend the deadline for payments until the time when the situation in credit markets and liquidity will be more favourable. Furthermore, before deficit of liquidity emerged, PIK bonds were partially used in the pattern of absorption with the help of borrowed funds which allowed borrowers to pay interest rates in form of debt liabilities, but not in cash. So, the total amount of interest rates reduced.
Moodyâ€™s warns that these factors are more likely only to delay inevitable negative consequences for rating of issuers of this sector due to the further aggravation of situation in the markets and ongoing financial crisis.