Moody's: Credit quality diving

THE QUALITY of credit in Western Europe continued to deteriorate sharply in the second quarter, with a record-breaking 122 financial institutions downgraded, according to Moody&rsquo;s.<br /><br />The ratings giant said the deterioration continued to hit most major economies in the region.<br /><br />In total, 177 bonds were downgraded, amid fears that companies may struggle to maintain repayments as dire economic conditions continue to take their toll.<br /><br />The agency was alarmed by a rapid deterioration in firms&rsquo; loan portfolios, tumbling asset values and dwindling capital reserves which could cause firms to default on bond coupon payments, Moody&rsquo;s said.<br /><br />But, investment-grade bonds &ndash; highly rated corporate credit &ndash; covered by Moody&rsquo;s continued to recover sharply in the second quarter, the group said.<br /><br />Investors switched out of government bonds into the investment-grade space during the quarter, the group said, causing investment-grade yields to fall, which in turn triggered healthy rises in the prices of the assets.<br /><br />&ldquo;The current macroeconomic landscape is much more positive than at the start of the year,&rdquo; said Moody&rsquo;s chief international economist Ruth Stroppiana.<br /><br />But she added Europe will remain in recession for the rest of 2009, although the pace of economic contraction will continue to slow leading to a gradual levelling off.