NEW YORK ( BBH FX Strategy) -- Eurozone stresses are back in the spotlight with a report on France that was issued by Moody's late in the North American afternoon Monday. It was not a rating action but rather an annual update on the state of the country.The agency noted that France's financial strength has weakened from the impact of the financial crisis, and that its debt metrics are "now among the weakest of France's Aaa peers." While Moody's said that France's financial strength remains "very high", it notes serious challenges in the coming months due to the likely the need to provide additional support to other eurozone sovereigns (European Financial Stability Facility contributions) or to its own banking system. The punch line is that "The deterioration in debt metrics and the potential for further contingent liabilities to emerge are exerting pressure on the stable outlook of the government's Aaa debt rating." Moody's added that it will monitor and assess the stable outlook over the next three months.
With France under the microscope, we think market attention will swing back to other core developed markets countries that are facing downward pressure on ratings too. Here is a summary of our most recent ratings outlooks for developed markets.
Next comes the UK, which we have long viewed as a likely candidate for downgrades since our model has it as AA/Aa2/AA vs. actual ratings of AAA/Aaa/AAA. S&P had the UK on credit watch negative during the financial crisis, but took it off in 2010 after the incoming Tory government instituted fiscal tightening. With growth prospects dimming, we think the agencies will take another look at the UK's AAA standing and start to consider downgrades. For now, all three have the UK on stable outlook so the first shots across the bow should be moves to negative outlooks in the coming months. Moody's cut Japan to Aa3 back in August after putting it on review in May, but put it back on stable outlook. We agreed with that move, and view Japan as AA-/Aa3/AA- compared to actual ratings of AA-/Aa3/AA. Only Fitch looks out of line now. Reconstruction spending may end up putting downward pressure on its ratings, however, and both S&P and Fitch have negative outlooks on Japan.
Our model has Ireland's implied rating at BB/Ba2/BB, which suggests that actual ratings of BBB+/Ba1/BBB+ remain vulnerable to downgrade risk. We note that S&P and Fitch have moved their outlooks to stable from negative. This is interesting as well as unwarranted, as S&P and Fitch are the most out of line with our model and are in need of adjustment downwards. Moody's has maintained a negative outlook on Ireland's Ba1 while being the closest to our implied Ba2 rating. Fitch recently said that it retained its negative outlook on Portugal's BBB- rating, suggesting that a junk rating is still in the cards. Our model has Portugal's implied rating at BB-/Ba3/BB-. Earlier this year, S&P affirmed its BBB- rating but kept a negative outlook. In July, Moody's cut Portugal to a junk level Ba2 with a negative outlook. With all three agencies keeping a negative outlook, further downgrades to actual ratings of BBB-/Ba2/BBB- appear likely and warranted. To complete our tour of the periphery, note that our model gives Greece implied ratings of CCC-/Caa3/CCC vs. actual CC/Ca/CCC. Those ratings are still vulnerable to downward pressure as S&P has a negative outlook, Moody's has a developing outlook (which apparently depends on how Greek debt is restructured), and Fitch is at stable.