As anticipated in November 2011, Moody’s Investors Service has today adjusted the sovereign debt ratings of selected EU countries in order to reflect their susceptibility to the growing financial and macroeconomic risks emanating from the euro area crisis and how these risks exacerbate the affected countries’ own specific challenges.

Moody’s actions can be summarised as follows:

– Austria: outlook on Aaa rating changed to negative

– France: outlook on Aaa rating changed to negative

– Italy: downgraded to A3 from A2, negative outlook

– Malta: downgraded to A3 from A2, negative outlook

– Portugal: downgraded to Ba3 from Ba2, negative outlook

– Slovakia: downgraded to A2 from A1, negative outlook

– Slovenia: downgraded to A2 from A1, negative outlook

– Spain: downgraded to A3 from A1, negative outlook

– United Kingdom: outlook on Aaa rating changed to negative

The implications of these actions for directly and indirectly related ratings will be reported through separate press releases.

The main drivers of today’s actions are:

– The uncertainty over (i) the euro area’s prospects for institutional reform of its fiscal and economic framework and (ii) the resources that will be made available to deal with the crisis.

– Europe’s increasingly weak macroeconomic prospects, which threaten the implementation of domestic austerity programmes and the structural reforms that are needed to promote competitiveness.

– The impact that Moody’s believes these factors will continue to have on market confidence, which is likely to remain fragile, with a high potential for further shocks to funding conditions for stressed sovereigns and banks.

To a varying degree, these factors are constraining the creditworthiness of all European sovereigns and exacerbating the susceptibility of a number of sovereigns to particular financial and macroeconomic exposures.

Moody’s has reflected these constraints and exposures in its decision to downgrade the government bond ratings of Italy, Malta, Portugal, Slovakia, Slovenia and Spain as listed above. The outlook on the ratings of these countries remains negative given the continuing uncertainty over financing conditions over the next few quarters and its corresponding impact on creditworthiness.

In addition, these constraints have also prompted Moody’s to change to negative the outlooks on the Aaa ratings of Austria, France and the United Kingdom. The negative outlooks reflect the presence of a number of specific credit pressures that would exacerbate the susceptibility of these sovereigns’ balance sheets, and of their ongoing austerity programmes, to any further deterioration in European economic conditions and financial landscape.

An important factor limiting the magnitude of Moody’s rating adjustments is the European authorities’ commitment to preserving the monetary union and implementing whatever reforms are needed to restore market confidence. These rating actions therefore take into account the steps taken by euro area policymakers in agreeing to a framework to improve fiscal planning and control and measures adopted to stem the risk of contagion.

The rating agency considers the ratings of the following European sovereigns to be appropriately positioned, namely Denmark (Aaa), Finland (Aaa), Germany (Aaa), Luxembourg (Aaa), Netherlands (Aaa), Sweden (Aaa), Belgium (Aa3), Estonia (A1) and Ireland (Ba1). Moody’s review of Cyprus’ Baa3 rating, as announced in November 2011, is ongoing, while the developing outlook on Greece’s Ca rating remains appropriate as the rating agency awaits clarification on the country’s debt restructuring.

As for Central and Eastern European sovereigns outside the euro area, Moody’s will be assessing the credit implications of the fragile financial market conditions and weak macroeconomic outlook during the first half of this year.

In related rating actions, Moody’s has today also downgraded the rating of Malta Freeport Co. to A3 from A2, and that of Spain’s Fondo de Reestructuración Ordenada Bancaria (FROB) to A3 from A1. Both of these issuers are government-guaranteed entities and therefore have a negative outlook in line with the outlook on their respective sovereign. Moody’s has today also changed the outlook on the Aaa debt rating of the Bank of England to negative, in parallel with its decision to change the outlook on the UK’s sovereign rating. Similarly, Moody’s has changed to negative the outlook on the Aaa debt ratings of the Société de Financement de l’Economie Française (SFEF) and the Société de Prise de Participation de l’Etat (SPPE) in line with the change of outlook on France’s sovereign rating.

The principal methodology used in these ratings was Sovereign Bond Ratings Methodology published in September 2008.

Moody’s downgrades Malta’s government bond rating to A3 from A2, negative outlook

Moody’s Investors Service has today downgraded Malta’s government bond rating to A3 from A2. The outlook remains negative.

The key drivers of today’s rating action on Malta are:

1.) The uncertainty over the prospects for institutional reform in the euro area and the weak macroeconomic outlook across the region, which will continue to weigh on already fragile market confidence.

2.) Malta’s relatively weak debt metrics compared with ‘A’ category peers and the country’s reliance on the strength of the European economy, which will dampen its own growth prospects in the medium term and worsen its debt dynamics.

Moody’s is maintaining a negative outlook on Malta’s sovereign rating to reflect the potential for a further decline in economic and financing conditions as a result of a deterioration in the euro area debt crisis.

In a related rating action, Moody’s has today also downgraded the foreign- and local-currency debt ratings of Malta Freeport Co. to A3 from A2 given its status as a government-guaranteed entity. The outlook remains negative in line with the sovereign rating.

RATIONALE FOR DOWNGRADE

A contributing factor underlying Moody’s one-notch downgrade of Malta’s government bond rating is the uncertainty over the euro area’s prospects for institutional reform of its fiscal and economic framework and over the resources that will be made available to deal with the crisis. Moreover, Europe’s weak macroeconomic prospects complicate the implementation of domestic austerity programmes and the structural reforms that are needed to promote competitiveness. Moody’s believes that these factors will continue to weigh on market confidence, which is likely to remain fragile, with a high potential for further shocks to funding conditions. In addition to constraining the creditworthiness of all European sovereigns, the fragile financial environment increases Malta’s susceptibility to financial and macroeconomic shocks given the concerns identified below.

The fragile external environment is exacerbating a number of Malta’s own challenges which continue to weigh negatively on the country’s debt rating and constitute the second driver of Moody’s downgrade. Malta’s debt metrics are among the weaker of the ‘A’-rated sovereigns. Growth prospects over the medium term also appear poorer for Malta than for its peers, given the country’s dependence on tourism from the euro area as its main source of economic growth. This will hinder the narrowing of the fiscal imbalance. Lower business confidence and tighter credit conditions are likely to result in weak private-sector investment, and real output growth is likely to be significantly lower than the government’s forecast of over 2%. The deteriorating growth prospects and the concomitant impact on already weak debt dynamics will further reduce government financial strength and expose it to more constrained, higher-cost funding conditions.

WHAT COULD MOVE THE RATING UP/DOWN

Downward pressure on the rating could develop if Malta’s economic growth prospects deteriorate significantly, thereby obstructing fiscal consolidation and leading to a significant further deterioration in the sovereign’s key credit metrics. The rating could also be downgraded if an intensification of the euro area crisis were to result in materially higher cost or constrained funding conditions for the government. A further deterioration of macroeconomic conditions in Europe, leading to material fiscal and debt slippage in Malta, could also pressure the rating.

Conversely, the negative outlook on Malta’s sovereign rating would be changed to stable in the event of a sustained improvement in investor sentiment across the euro area. Although unlikely in the foreseeable future, the government’s ratings could move upward in the event of a significant improvement in the government’s balance sheet, leading to greater convergence with ‘A’ category medians. Substantial structural reforms focused on enhancing competitiveness and boosting potential output growth rates would also be credit-positive.

Moody’s changes the outlook on Austria’s Aaa rating to negative

Moody’s Investors Service has today changed the outlook on the Aaa rating of the Republic of Austria to negative from stable. Concurrently, Moody’s has affirmed Austria’s short-term debt rating of Prime-1.

The key drivers of today’s action on Austria are:

1.) The uncertainty over the prospects for institutional reform in the euro area and the weak macroeconomic outlook across the region, which will continue to weigh on already fragile market confidence.

2.) The balance sheet of the Austrian government is exposed to larger contingent liabilities than is the case for other Aaa-rated sovereigns in the EU, mainly on account of the relatively large size of Austria’s banking sector, its substantial exposure to the more volatile economies in Central and Eastern Europe and the reliance of the banks on wholesale funding markets. The stand-alone credit strength of the Austrian banking sector is low for a Aaa-rated sovereign.

3.) While the concerns over the banking sector are not new, Austria’s debt metrics are weaker today than they were in 2008-2009, the last time that the Austrian government provided support to its banks. The Austrian government’s debt metrics are also weaker than some of those of other Aaa-rated peers.

Moody’s changes the outlook on France’s Aaa rating to negative

Moody’s Investors Service has today changed the outlook on the Aaa rating of France’s local- and foreign-currency government debt to negative from stable.

The key drivers of today’s outlook change on France are:

1.) The uncertainty over the prospects for institutional reform in the euro area and the weak macroeconomic outlook across the region, which will continue to weigh on already fragile market confidence.

2.) The ongoing deterioration in France’s government debt metrics, which are now among the weakest of France’s Aaa-rated peers.

3.) The significant risks to the French government’s ability to achieve its fiscal consolidation targets, which could be further complicated by a need to support other European sovereigns or its own banking system.

Concurrently, Moody’s has today also changed to negative the outlook on the Aaa debt ratings of the Société de Financement de l’Economie Française (SFEF) and the Société de Prise de Participation de l’Etat (SPPE) in line with the change of outlook on France’s sovereign rating.

Moody’s downgrades Italy’s government bond rating to A3 from A2, negative outlook

Moody’s Investors Service has today downgraded the Italian government’s local- and foreign-currency debt rating to A3 from A2. The outlook remains negative. Concurrently, Moody’s has downgraded the country’s short-term rating to Prime-2 from Prime-1.

The key drivers of today’s rating action on Italy are:

1.) The uncertainty over the prospects for institutional reform in the euro area and the weak macroeconomic outlook across the region, which will continue to weigh on already fragile market confidence.

2.) The challenges facing Italy’s public finances, especially its large stock of debt and high cost of funding, as well as the country’s deteriorating macroeconomic outlook.

3.) The significant risk that Italy’s government may not achieve its consolidation targets and address its public debt given the country’s pronounced structural economic weakness.

Moody’s is maintaining a negative outlook on Italy’s sovereign rating to reflect the potential for a further decline in economic and financing conditions as a result of a deterioration in the euro area debt crisis.

Moody’s downgrades Portugal’s government bond rating to Ba3 from Ba2, negative outlook

Moody’s Investors Service has today downgraded the government of Portugal’s long-term debt ratings to Ba3 from Ba2. The outlook remains negative.

The key drivers of today’s rating action on Portugal are:

1.) The uncertainty over the prospects for institutional reform in the euro area and the weak macroeconomic outlook across the region, which will continue to weigh on already fragile market confidence.

2.) The resulting potential for a deeper and longer economic contraction in Portugal than previously anticipated, and the ongoing deleveraging process in the country’s economy and banking system.

3.) The higher-than-expected general government debt ratios, which are due to reach roughly 115% of GDP within the next two years, thereby significantly limiting the room for fiscal manoeuvre and commensurately reducing the likelihood of achieving a declining debt trajectory.

4.) Potential contagion emanating from the impending Greek default, which is likely to extend the period during which Portugal is unable to access long-term private markets once the current support programme expires.

Moody’s is maintaining a negative outlook on Portugal’s sovereign rating to reflect the potential for a further decline in economic and financing conditions as a result of a deterioration in the euro area debt crisis.

Moody’s downgrades Slovakia’s government bond rating to A2 from A1, negative outlook

Moody’s Investors Service has today downgraded Slovakia’s government bond ratings to A2 from A1. The outlook has been changed to negative.

The key drivers of today’s rating action on Slovakia are:

1.) The uncertainty over the prospects for institutional reform in the euro area and the weak macroeconomic outlook across the region, which will continue to weigh on already fragile market confidence.

2.) Slovakia’s increased susceptibility to financial and political event risk, presenting considerable challenges to achieving the government’s fiscal consolidation targets and reversing the adverse trend in debt dynamics.

3.) The increased downside risks to economic growth due to weakening external demand.

Moody’s has changed the outlook on Slovakia’s sovereign rating to negative to reflect the potential for a further decline in economic and financing conditions as a result of a deterioration in the euro area debt crisis.

Moody’s downgrades Slovenia’s government bond rating to A2 from A1, negative outlook

Moody’s Investors Service has today downgraded Slovenia’s local- and foreign-currency government bond ratings to A2 from A1. The outlook remains negative.

The key drivers of today’s rating action on Slovenia are:

1.) The uncertainty over the prospects for institutional reform in the euro area and the weak macroeconomic outlook across the region, which will continue to weigh on already fragile market confidence.

2.) The risk to Slovenia’s public finances from potential further shocks, especially the possible need to provide further support to the nation’s banking system.

3.) The difficulties that Slovenia’s small and open economy faces in view of weak growth among key European trading partners, and the resulting significant challenge to the government’s ability to achieve its medium-term fiscal consolidation plans.

Moody’s is maintaining a negative outlook on Slovenia’s sovereign rating to reflect the potential for a further decline in economic and financing conditions as a result of a deterioration in the euro area debt crisis.

Moody’s downgrades Spain’s government bond rating to A3 from A1, negative outlook

Moody’s Investors Service has today downgraded the government bond rating of the Kingdom of Spain to A3 from A1. The outlook on the rating is negative.

Concurrently, Moody’s has also downgraded the rating of Spain’s Fondo de Reestructuración Ordenada Bancaria (FROB) to A3 with a negative outlook from A1, in line with the sovereign rating action, given that FROB’s debt is fully and unconditionally guaranteed by the Kingdom of Spain. Both Spain’s and the FROB’s short-term ratings have been downgraded to (P)Prime-2 from (P)Prime 1.

The key drivers of today’s rating action on Spain are:

1.) The uncertainty over the prospects for institutional reform in the euro area and the weak macroeconomic outlook across the region, which will continue to weigh on already fragile market confidence.

2.) The country’s challenging fiscal outlook is being exacerbated by the larger-than-expected fiscal slippage in 2011, mainly on account of budget overshoots by Spain’s regional governments. Moody’s is sceptical that the new government will be able to achieve the targeted reduction in the general government budget deficit, leading to a further increase in the rapidly rising public debt ratio.

3.) The pressures on the Spanish economy, which is close to entering a renewed recession, will be further increased by the need for even stronger action to achieve a deficit reduction. A renewed recession will also negatively affect the profitability of Spanish banks at a time when they are required to clean up their balance sheets.

Moody’s is maintaining a negative outlook on Spain’s sovereign ratings to reflect the potential for a further decline in economic and financing conditions as a result of a deterioration in the euro area debt crisis..

Moody’s changes the outlook on the United Kingdom’s Aaa rating to negative

Moody’s Investors Service has today changed the outlook on the United Kingdom’s Aaa government bond rating to negative from stable.

The key drivers of today’s action on the United Kingdom are:

1.) The increased uncertainty regarding the pace of fiscal consolidation in the UK due to materially weaker growth prospects over the next few years, with risks skewed to the downside. Any further abrupt economic or fiscal deterioration would put into question the government’s ability to place the debt burden on a downward trajectory by fiscal year 2015-16.

2.) Although the UK is outside the euro area, the high risk of further shocks (economic, financial, or political) within the currency union are exerting negative pressure on the UK’s Aaa rating given the country’s trade and financial links with the euro area. Overall, Moody’s believes that the considerable uncertainty over the prospects for institutional reform in the euro area and the region’s weak macroeconomic outlook will continue to weigh on already fragile market confidence across Europe.

Concurrently, Moody’s has today also changed to negative the outlook on the Aaa debt rating of the Bank of England in line with the change of outlook on the UK’s sovereign rating.

Matese Governement reaction

The Maltese Finance Ministry has said in a statement that it “noted that Moody’s had downgraded Malta’s ratings among a number of other European countries. Moody’s justifies this because of the deteriorating financial and economic situation in Europe. The current situation was having an impact on investor confidence and Moody’s had therefore revised growth prospects downwards.”

The Ministry continued by saying that the Moody’s statement referred to the impact that measures of austerity were taking on other countries, which will affect among others tourism in Europe. This reduction in the rate of economic growth presents challenges in the largest area for financial sustainability. This, the Governement said reinforced its decision to rein in its spending and focus its investment on those economic sectors which created most jobs.

The Government also noted that Malta was one of only two countries to have reduced its deficit in 2010, at the height of the financial crisis, which had gained praise from the EU this also halted the excessive deficit procedure.

The Government concluded by saying that it would continue to offer incentives to encourage investment and job creation and that it would continue to boost sectors such as tourism where the MTA had been given a bigger budget.

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