Moody’s Investors Service reports that global credit quality continued to improve in the second quarter of 2005, as rating upgrades strongly outpaced downgrades in Europe, Latin America, and the Asia-Pacific region. However, it suggests that improvements in credit may moderate in the next several quarters.

Last quarter, the ratio of upgrades to downgrades stood at 1.53, up from 1.44 in the first quarter of 2005, Moody’s reports. Although it notes that part of this improvement in upgrade-downgrade ratio reflects Moody’s applying joint default analysis for government-related issuers in Europe for the first time. Over 5.4% of the rated issuers were upgraded in Europe, with only 1.9% of the issuers being downgraded. Over half of the upgrades in Europe, however, were the result of the JDA initiative.

In addition to Europe, the Asia-Pacific region continued to experience the most pronounced improvements in credit quality. In Asia-Pacific, about 5% of the issuers were upgraded and only 2.5% of the issuers downgraded. Upgrades of selected government-related issuers in this region are expected early in the third quarter of 2005.

“Further upgrades in both Asia-Pacific and Europe are likely but at a slower pace,” says Moody’s vp Praveen Varma, “as less than 3.5% of issuers in both regions were on review for upgrade at the end of June.”

Latin America also experienced an improvement in credit quality with 4.4% of the rated issuers in the region getting upgraded and only 1.1% of issuers being downgraded, Moody’s says. The Middle East and Africa region saw the highest percentage of issuers being upgraded, with 10.5% of the rated issuers being upgraded and no issuers downgraded.

In North America, about 3.3% of issuers were upgraded compared to 3.3% being downgraded last quarter. “North-American credit quality may see a slight deterioration in next couple of quarters as 4.4% of the rated issuers are on review for downgrade compared to only 1.8% of the issuers that are on review for upgrade,” says Varma. This is in line with global credit quality trends where more issuers are now on review for downgrade than for upgrade.

“While the second quarter 2005 saw more upgrades than downgrades for both investment-grade and speculative-grade issuers, investment-grade issuers will more likely see a higher proportion of downgrades than upgrades compared to speculative-grade issuers,” Varma says. Investment-grade issuers accounted for roughly 70% of all reviews for downgrade, whereas reviews for upgrade were distributed roughly evenly between investment-grade and speculative-grade issuers.