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Article by godoftrading    (05-02-08 02:46 PM)

By John Glover

April 28 (Bloomberg) -- European corporate credit quality is sinking at an ``alarming'' rate as rising oil prices, the possibility of a U.S. recession and the euro's strength restrain the region's economy, Moody's Investors Service said.

Moody's assigned 32 ``negative'' outlooks to European companies in the first quarter, almost triple the 11 that were ``positive,'' the New York-based ratings firm said in a report today. The gap is the widest since 2001 and indicates deteriorating credit quality in 12 to 18 months, Moody's said.

``The negative outlook gap is quite alarming,'' Moody's economists Christine Li and Kimberly Forkes wrote in London. ``Uncertainty about the U.S. recession, nervous financial markets, higher input costs for business and an appreciating euro are restraining the euro-zone economy.''

The International Monetary Fund in Washington estimates economic growth in the 15-nation euro region will slow to 1.4 percent this year from 2.6 percent in 2007. Moody's Chief Economist John Lonski said in a March 27 Bloomberg Television interview that the U.S. is already in a ``mild'' recession, after growth slowed to a 0.6 percent annual rate in the final three months of 2007.

Losses at banks are hampering lending, and will have a ``greater and more prolonged'' impact on non-financial businesses, Moody's said. Banks reported $308 billion of writedowns and credit losses tied to the collapse of the subprime mortgage market, according to data compiled by Bloomberg.

Oil, Euro

Crude oil futures soared to $119.90 a barrel in New York last week, the highest since trading began in 1983. The euro rose 7 percent against the dollar this year, reaching a record $1.6019 on April 22.

A 1 percentage point increase in the euro's real exchange rate reduces export growth 0.6 percent within a year, according to a note this month from Frankfurt-based Deutsche Bank AG, the biggest currency trader. The euro appreciated 9.8 percent over the past year against a basket of currencies, according to an index from the Bank of England that's adjusted for inflation.

European Central Bank President Jean-Claude Trichet told reporters at a conference in Frankfurt last week the bank is concerned that the euro's surge may hurt the economy.

Moody's Changes

Moody's cut ratings on 35 companies in the first three months and upgraded 17, the worst ratio since the third quarter of 2006, the firm said.

Financial companies were hit hardest by credit market turmoil, with downgrades rising to 17 from 14, the most since 2003 and ``a sign of rising financial stress,'' Moody's said. There were 10 more downgrades than upgrades among lenders.

Default rates among high-yield, high-risk borrowers will rise in the next 12 months, Moody's said. High-yield debt is rated below Baa3 by Moody's.

The extra yield investors demand to hold European high-yield bonds rather than similar-maturity government debt soared to as much as 815 basis points in March, the widest since 2003, Merrill Lynch & Co. indexes show. The gap increased from 496 basis points, or 4.96 percentage points, at the end of 2007.

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