EU support package alleviates liquidity concerns, says Moody’s

The far-reaching support package announced by European policymakers over the weekend not only alleviates liquidity concerns for governments, but also represents a potentially decisive step towards greater fiscal integration of the European Monetary Union (EMU), Moody's Investors Service said in a new Special Comment.
According to Arnaud Mares, Senior Vice President in Moody's Sovereign Risk Group, the main credit implications of these measures for European sovereigns are as follows:
1. Large-scale liquidity support from euro area peers, the EU, the ECB and the IMF materially reduces the liquidity risk for European sovereigns.
2. The concrete expression of solidarity that these measures represent are leading to a limited mutualisation of risk among European governments. This is marginally credit-negative for the stronger governments in EMU. But the alternative — a de-integration of the euro area — would have been more damaging and credit-negative.
3. The measures represent a step towards replacing peer pressure with peer control in the context of fiscal surveillance. A strengthening of the institutional fiscal framework in Europe — about which details have yet to be provided — would be credit-positive for the region as a whole.
4. The breakdown of confidence in the market has put an end to the debate about how long European governments can maintain an expansionary fiscal stance. The timeframe available to governments to announce and implement fiscal retrenchment (and to deal with longer-term challenges to debt sustainability) has been dramatically reduced. This will result in accelerated — and painful — simultaneous fiscal tightening across Europe.