Downside risks to the euro area credit outlook still remain, Moody’s ratings agency said on Tuesday. The ratings agency noted in a report that while the current confrontation between the new Greek government and its euro area creditors has so far produced no contagion in the other member-states, Greece leaving the euro could still have serious consequences for the euro area as a whole and the periphery in particular. Such a scenario would inevitably raise questions about what pressures might cause other countries to leave a currency union that was designed to be indivisible.
In Moody’s view, the other key downside risk is an unexpectedly prolonged period of very low inflation and growth. Such an outcome would lead to a further continuous rise in public debt ratios in most euro area countries, with no stabilization in sight even by 2018. Aside from postponing further improvements in sovereign credit fundamentals, persistent high debt levels would leave a number of sovereigns exposed to further shocks to confidence or growth.
The report stressed that credit quality has stabilized in the euro area and after ratings upgrades in 2014, with 15 out of the 19 euro area sovereign ratings now carrying a stable outlook. The outlooks on the ratings of Spain (Baa2) and Lithuania (Baa1) are positive, while France’s Aa1 rating has a negative outlook and Greece’s Caa1 rating is currently on review for possible downgrade. “Overall, we see only limited potential for sovereign ratings in the euro area to improve from current levels, and downside risks remain,” said Kathrin Muehlbronner, Moody’s Vice President – Senior Credit Officer, and author of the report.
“The mostly stable outlooks reflect our forecast for a moderate economic recovery this year as well as some further progress in reducing the budget deficits in many countries. However, most of the fiscal improvement expected this year is due to the re-emergence of growth rather than active policy measures and will in most cases be rather moderate. Public debt will continue to rise in most countries of the region, a key factor constraining the ratings. Only four countries will see their debt ratios decline this year”, Muehlbronner added.
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