Moody's warns of looming credit crunch

The financial health of European businesses is declining at its fastest rate since the dotcom crash of 2002, the ratings agency Moody's warned yesterday.

In a stark report Moody's said it had changed the ratings of 190 debt issuing companies in 2006, of which 117 were downgrades and just 73 were upgrades.

The balance of upgrades to downgrades therefore stood at minus 44, compared to plus five in 2005. It has not been that low since 2002, when the aftershocks of the dotcom crash were still battering the world's financial markets and the balance was minus 159.

The report follows the alarm sounded by Britain's City watchdog about the credit quality of companies. The Financial Services Authority warned that the failure of a major debt-backed private-equity deal was "all but inevitable" as private-equity firms use ever higher levels of borrowing to fund buyouts.

The FSA voiced concerns that the implications of that could be far reaching, with deals now so complex that it is often hard to tell who has lent what to whom.

Moody's also predicted a further fall in credit quality this year, although the agency said it expected it to be "slight" except in the event of serious economic shocks.

The agency said its 12-month rolling share of upgrades for non-financial companies for the year 2006 fell to 35 per cent, the lowest since 2003 when it hit 16.3 per cent. That means the credit worthiness of these companies is falling at its fastest pace for three years.