Global credit quality is likely to show increasing stability, Moody’s Investors Service says in its latest quarterly report on rating actions, reviews and outlooks.

Moody’s says there were slightly more upgrades than downgrades in the second quarter of 2004, putting the downgrade-to-upgrade ratio at 0.97. This was the second quarter in a row that upgrades outnumbered downgrades. A year ago, downgrades outnumbered upgrades by 3.2 to 1.

“Watchlist and Outlook distributions also suggest an increasingly stable credit environment,” says Moody’s assistant vice president/analyst Hong Sherwin, author of the report. At the half year mark, the proportion of all rated global issuers with negative outlooks stood at 14.1%, a remarkable reduction from 18.8% at the beginning of the year.

“The share of issuers with positive outlook or on watch for upgrade has been steadily growing,” says Hong, “while the share of watches for downgrade has been fairly stable since the beginning of the year and has decreased sharply from a year ago.”

Moody’s notes that rating downgrades continued to outpace upgrades last quarter in the U.S. and Canada, but only by the narrowest of margins, with the downgrade-to-upgrade ratio at 1.04 for the quarter. A year ago, this ratio in the U.S. and Canada was 2.8 to 1.

European issuers experienced more upgrades than downgrades, with a downgrade-to-upgrade ratio of 0.8, down impressively from 2.6 of a year ago. Moody’s notes, however, that 2.6 times more issuers in Europe are on watch for downgrade than for upgrade, suggesting that the fast upswing in improved rating actions could face some pressure.

With upgrades outnumbering downgrades by just more than 2 to 1 last quarter, the Asia-Pacific region continues to show more of the extraordinary credit strength that it began demonstrating in the second quarter of 2003, but at a more measured pace. The region is likely poised for more credit improvement, as there are five times as many issuers on review for upgrade than downgrade in the region, led by issuers in Australia and Japan.

By industry, Moody’s notes that the rapid pace of upgrades in the broad financial sector seems to have slowed, with the sector’s share of quarterly upgrades dropping from 38% in the first quarter to 19.6% in the second quarter. Within financials, the insurance sector, both life and non-life, made up 77% of all downgrades. Non-life insurance tops airlines for the highest rate of downgrades among issuers over both the last 3 months and the last year.

“However, the insurance sector may soon turn a corner as rating reviews for upgrade currently exceed those for downgrade, and their share of all negative outlooks fell from 22% to 15%,” says Hong.