Moody’s Latest Warning a Reality Check for Europe

The warning by ratings agency Moody’s that it may cut the triple-A ratings of two of the euro zone’s largest countries, France and the United Kingdom, was met with resignation by analysts and economists Tuesday.

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“This is a reality check and a reminder that the LTRO isn’t a cure for all the problems we have,” James Ashley, senior economist at RBC Capital Markets, told CNBC Tuesday, referring to the European Central Bank’s long-term refinancing operation, which gives cheap loans to banks. “The fact that it’s a negative outlook rather than negative watch suggests that these countries will hold on to their ratings for longer.”

Chancellor of the Exchequer George Osborne, who has frequently stressed the importance of the U.K.’s triple-A credit rating, reasserted his commitment to the government’s spending cuts program in the wake of the announcement.

Moody’s also said it may cut Austria’s triple-A rating and downgraded the ratings of Italy, Portugal, Spain, Slovakia, Slovenia, and Malta.

Ratings agencies have been attacked during the financial crisis for assigning triple-A ratings to instruments that later caused the credit crunch.

“They’re ahead of the curve this time round to some extent, having been behind it for much of the crisis,” said Ashley.

While markets have rallied this year as optimism grew about the euro zone, the region’s economy is not out of the woods yet.

The Greek government’s new austerity legislation has been met with violent protests on the streets of Athens.

“If I was Greek, I wouldn’t be going for these measures, I’d be going for default and getting it over with. Would you like two to three years of pain or 20?” Jon Moulton, chairman of Better Capital, told CNBC.

“We haven’t got the shock and awe needed yet for most governments — except Greece,” he added. “It’s difficult because there’s still a lot of instability and a debt crisis. We have got quantitative easing which we never had before.”

The public sector is still too big across the euro zone, Moulton argues.

“As long as your public sector is too big, you will have low growth and as long as debt keeps rising, instability remains and it could explode at any time,” he said.

He believes that governments can stimulate growth by cutting spending, citing the U.K. between 1993-1999 as an example.