Credit quality in western Europe deteriorated to its lowest level in five years in the second quarter of 2008 as economies grappled with rising inflation and slowing growth, Moody's Investors Service said on Monday. The ratings agency said in a report it had downgraded 41 issuers in western Europe and upgraded 12 - the worst ratings gap since the first quarter of 2003.
This gap is expected to widen in coming months given the high number of issuers placed on review for possible downgrade. "Credit conditions are worsening, with slowing activity, weakening earnings and tighter monetary policy likely to raise the risks of corporate defaults. The downturn in the current credit cycle is unlikely to be over yet," Christine Li, a Moody's economist, said in the report. Moody's said credit quality in eastern Europe was in better shape, even though the ratings balance turned negative for the first time since the first quarter of last year with five downgrades and three upgrades in the second quarter.
The agency said the recovery in debt issuance from western European companies in the second quarter was unlikely to last, because there was growing preference for equity financing by entities looking to improve their capital ratios. But the ratings agency said a glimmer of hope remained, with rating outlook statistics suggesting that credit quality may stabilise in the coming 12 to 18 months.
Moody's said speculative-grade issuers were weathering the downturn by comparison with their investment-grade peers, which experienced a greater rate of deterioration in the quarter.
Moody's expects a further weakening of credit quality in the second half of this year. Of the 52 issuers placed on review in the first half of 2008, just 13 percent were on review for upgrade, compared with 27 percent in the second half of last year.