Moody's credit agency has stressed the significance it attaches to EU membership regarding a country's credit worthiness by upgrading the foreign-currency country ceilings and the ratings of the foreign currency government bonds of eight EU acceding countries expected to join the EU in early 2004.

Moody's yesterday said that the ratings for Cyprus (A2) and Malta (A3) - two other countries on track for EU admission in 2004 - were not affected because foreign and local currency ratings for these countries were already at the same level.

In its latest update report on Malta issued two months ago, Moody's said: "The country's status as a front-runner to join the European Union in the next enlargement round was a key rating driver, although domestic political opposition casts doubt on the inevitability of accession".

A government's foreign currency rating reflects its ability and willingness to make interest and principal payments on its own foreign-currency denominated debt obligations.

Commenting on the upgrade of the eight EU acceding countries' credit rating, Moody's yesterday said: "The upgrades reflect Moody's view that the process of economic and financial integration of these countries with the EU is virtually irreversible. Such integration significantly reduces the risk of a foreign currency crisis that could lead to a systemic interruption in the timely servicing of foreign currency debt by issuers domiciled in the country."

Moody's believes that while each of the eight countries upgraded will proceed at their own pace post-2004 to adopt the euro as their local currency, they will all be working to improve monetary stability and fiscal performance with an eye to entering the European Monetary Union (EMU) as early as 2006-2008.

The resulting reduction in foreign currency transfer risk - which will be completely eliminated at the time of EMU entry - means that the level and trend in total government debt will become the primary drivers for creditworthiness, as in the advanced industrial countries. This allows all government debt, regardless of the currency in which it is issued, to be rated at an equivalent level. Consequently, foreign currency-denominated government bonds have been upgraded to each country's respective local currency government debt rating, which reflects Moody's opinion of the fundamental creditworthiness of the government.

The countries affected are: Czech Republic (to A1 from Baa1); Estonia (to A1 from Baa1); Hungary (to A1 from A3); Latvia (to A2 from Baa2); Lithuania (to Baa1 from Ba1); Poland (to A2 from Baa1); Slovakia (to A3 from Baa3); and Slovenia (to Aa3 from A2).

In each case, the foreign currency ceiling and government foreign currency bond ratings have been upgraded to the level of Moody's current rating on local currency government bonds.

These actions are also a part of Moody's ongoing evaluation of global changes in currency convertibility risk, which most recently resulted in upgrades of the foreign currency ceilings of Australia, Iceland, Japan, and New Zealand.