Moody's Investors Service said Friday the period of calm experienced in Europe in the past six months will come to an end without progress on area-wide reforms, potentially leading Spain and Italy losing bond market access at a time of sizeable refinancing needs.
The rating agency said that positive developments since summer have reassured investors that a resolution to the ongoing euro-zone crisis will be forthcoming.
But Moody's said that progress on what needs to be accomplished to provide a fix--economic growth, achieving debt consolidation at a national level, and progress in fundamental institutional reforms--has been slow.
"So long as we continue to see slow progress, the risk that we lurch back into a further shock continues to rise," said Alastair Wilson, chief credit officer in Europe at Moody's.
This shock would come in the way of increasingly volatile bond yields in the region's weaker countries, which could lead to credit rating downgrades. Moody's rates Spain just one notch above junk at Baa3.
At an extreme, Moody's said Spain and Italy could lose access to private investors. Moody's central scenario is that Spain, Italy and other European countries won't lose access to private markets.
The period of calm was brought about by signs of a shift in mindset from policy makers and recent actions by the European Central Bank, which in September pledged to buy government bonds from countries that request an financial rescue program.
The Moody's report compared the lull with the period earlier in 2012 after the ECB's long-term refinancing operation.
These quiet periods can only last as long as investors remain persuaded that national and euro-area governments will use the time to push forward with reforms, Moody's said.
"In an escalating crisis every pause assumes a greater significance than the last, and this one is particularly significant given the important pronouncements by policymakers in the summer," the report said.
"A further shock could well see other governments--including the Spanish and Italian governments--no longer being able to rely upon the private markets to refinance maturing debt."
Mr. Wilson said that Moody's still assumes Spain will request a bailout prbogram. "The longer it stays out of a program, that uncertainty in itself can be destabilizing," he said.
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The rating agency said that positive developments since summer have reassured investors that a resolution to the ongoing euro-zone crisis will be forthcoming.
But Moody's said that progress on what needs to be accomplished to provide a fix--economic growth, achieving debt consolidation at a national level, and progress in fundamental institutional reforms--has been slow.
"So long as we continue to see slow progress, the risk that we lurch back into a further shock continues to rise," said Alastair Wilson, chief credit officer in Europe at Moody's.
This shock would come in the way of increasingly volatile bond yields in the region's weaker countries, which could lead to credit rating downgrades. Moody's rates Spain just one notch above junk at Baa3.
At an extreme, Moody's said Spain and Italy could lose access to private investors. Moody's central scenario is that Spain, Italy and other European countries won't lose access to private markets.
The period of calm was brought about by signs of a shift in mindset from policy makers and recent actions by the European Central Bank, which in September pledged to buy government bonds from countries that request an financial rescue program.
The Moody's report compared the lull with the period earlier in 2012 after the ECB's long-term refinancing operation.
These quiet periods can only last as long as investors remain persuaded that national and euro-area governments will use the time to push forward with reforms, Moody's said.
"In an escalating crisis every pause assumes a greater significance than the last, and this one is particularly significant given the important pronouncements by policymakers in the summer," the report said.
"A further shock could well see other governments--including the Spanish and Italian governments--no longer being able to rely upon the private markets to refinance maturing debt."
Mr. Wilson said that Moody's still assumes Spain will request a bailout prbogram. "The longer it stays out of a program, that uncertainty in itself can be destabilizing," he said.
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