European credit quality falls further in Q2-Moody's

Overall credit quality in Western Europe deteriorated in the second quarter of 2008 amid fragile market conditions, Moody's said in a report on Monday.

The ratings agency downgraded 41 issuers in Western Europe and upgraded 12 -- the worst ratings gap since the first quarter of 2003.

But Moody's said credit quality in Eastern Europe was in better shape as the region saw 5 downgrades and 3 upgrades in the second quarter this year, although it is the first time since the first quarter last year its rating balance has turned negative.

European economies grappled with rising inflation and slowing growth, both of which show no signs of abating, Moody's said.

"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 Lu, a Moody's economist, said in the report.

The agency said the recovery in debt issuance from Western European issuers in the second quarter was unlikely to last as 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 an increased rate of deterioration during the second quarter.

Moody's expects further erosion of credit quality in the second half of 2008. Of the 52 issuers placed on review in the first half of 2008, only 13 percent were on review for upgrade, compared with 27 percent in the second half of last year.

The agency said waning economic sentiment and higher interest costs would result in lower private consumption and fixed income in the euro zone, which could in turn make the European Central Bank consider loosening its monetary policy later in the year.

Among sectors, Moody's picked auto and parts as most likely to outperform in the medium and short term, while adding that the retail sector would experience the most pressure on its credit metrics.

Source: Reuters