By Vassilis Kostoulas
Top Moody’s analyst Olivier Beroud this week assessed that uncertainty in Greece will continue to impede implementation of the country’s bailout program, which in turn poses risks for the recently completed recapitalization of Greece’s systemic banks.
In an interview with “N”, Moody’s managing director of Europe, the Middle East and Africa, said the biggest risks to a Greek recovery are the high percentage of non-performing loans (NPLs) in the country and deferred tax assets.
Beroud said the Tsipras government is facing “significant head winds”, something that means that mid-term prospects for economic growth remain fragile.
He reminded that the Greek state’s bond credit rating is at Caa3 with a stable outlook, before adding that the environment he cited does not change the ratings agency’s view that Greece will not exit the Eurozone.
Moody’s predicts that the level of public debt will stabilize in a majority of Eurozone members by the end of 2016, with the determining factor will be the EU’s cohesion, which Beroud said will be tested by the ongoing refugee crisis.
He also called results of the ECB’s quantitative easing as limited, while low oil prices had a neutral result on the EU’s economy.
How is the global debt evolving in 2016?
In a global economy in which economic growth fails to pick up steam over the next two years, global debt is exposed to several areas of risks. Those areas include the slowdown in China, lower commodity prices and tighter financing conditions in some countries.
Whereas 75% of our global sovereign ratings carry a stable outlook, we see pressure on the creditworthiness of commodity-exporters as well as some emerging markets that are particularly dependent on external funding conditions.
What are the good and what are the bad news for the Eurozone?
Europe is on a path to recovery, supported by a relatively weak euro and low commodity prices. Moreover, we see a stabilization of fiscal metrics, as well as a continuation of a moderate economic recovery, although medium-term growth potential remains low at less than 2%. We also forecast that public debt levels will stabilize by end-2016 in the majority of euro area countries.
However, one important theme we’re monitoring for Europe in 2016 is EU cohesion. Apart from the austerity debate, the migrant crisis is another example of diverging views among European policymakers. Recent elections in Portugal, Spain and Ireland yielded inconclusive outcomes.
Our expectations of EU cohesion and major reform efforts at an EU or national level were already waning so more challenges – including disagreements over refugees –make it even more unlikely we’ll see credit-supportive policies. However, these developments don’t in themselves pose threats unless anti-austerity really starts to unwind improvements made in recent years.
A potential Brexit could be more significant if it triggered further support for exit movements elsewhere and marked the start of a slippery slope.
What is so far the impact of the ECB's quantitative easing program?
The ECB’s quantitative easing (QE) programme has only a limited effect on growth, credit and inflation across the euro area. Whereas the credit effects of QE vary by sector, we think overall they are limited. That said, a weakening of the euro helps euro area exporters and is likely to be the most effective of the diverse channels through which the QE programme can work. For banks, the immediate effects of QE is mixed, as positive economic effects are offset by the negative impact of interest rates being lower for longer, which squeezes margins.
What about cheap oil? Is this after all a positive or also a negative development for the global economy?
In many parts of the world the positive impact has been felt more through government finances than through growth, since it’s allowed fuel subsidies to be cut. The question will be whether the lower subsidies stick once prices rise.
In the EU our view is that lower energy prices have been part of the slightly positive growth story – QE-related euro depreciation and lower energy prices have boosted growth somewhat. But it’s also fuelled lowflation which is a negative. So taking all those factors into account, the impact is likely to be neutral.
In addition, downside risks to global growth have increased over the past few months as a further fall in oil prices, concerns about weaker growth in China and potential further currency weakness for some emerging markets have accompanied a rise in risk aversion and tightening of financial market conditions for some emerging markets.
How does Moody’s assess the situation in Greece? Which is the baseline scenario in view of the program’s evaluation?
Our Greek sovereign rating is at Caa3 with a stable outlook. Even after the elections in September which brought a parliamentary majority for the government of Prime Minister Tsipras, the implementation of reforms required under the support programme funded by the European Stability Mechanism remains challenging, and the government faces currently very significant headwinds.
When will Greece be able to "look" at the markets again, realistically? Which are the requirements, based on Moody's rating criteria?
As a rating agency, we do not set criteria for issuers to participate in capital markets activity. That said, access to funding is one of the areas we factor into our credit assessments. We expect that the environment of uncertainty in Greece could continue to pose a challenge for banks in particular, for which the high level of non-performing loans remains a risk.
In 2014 Greece proceeded in limited borrowing from the markets. Was this an indication of Greek economy’s return which was subsequently stalled? Or was it just an isolated minor incident?
We expect that Greece’s environment of uncertainty – given the weak state of the economy, as well as political and social tensions related to ongoing fiscal austerity – will continue to contribute to the challenge of implementing the support programme funded by the European Stability Mechanism. Medium-term economic growth prospects remain fragile.
Would a further “haircut” of the Greek public debt operate positively or negatively for Greece's profile in the markets? Why?
As a credit rating agency, it is not our role to offer policy advice.
How do you evaluate the data concerning the Greek banks?
We’ve seen an improvement in Greek banks’ solvency levels. Last month we upgraded four Greek banks’ senior unsecured ratings and affirmed a fifth bank’s deposit rating, which primarily reflects the successful completion of the recapitalisation process by these banks, resulting in a strengthened capital base, as well as our expectation of modest and gradual improvements in funding and liquidity.
However, amid an environment of uncertainty and potential volatility, the high level of non-performing loans and deferred tax assets (DTAs) across the Greek banking system remain significant risks for banks’ credit profiles.
Is there a Grexit scenario on the table?
Our base case scenario remains that Greece won’t exit the euro area.
How worrying are the recent pressures on Deutsche Bank and are these reflective of broader concerns about the German and the European economy?
As far as we can judge, the pressures on Deutsche bank were not a reflection of the fundamentals of the bank but rather investors’ concerns about the availability of sufficient available distributable resources to service coupons on AT1 hybrid securities in 2016.
Looking at European banks in general, we’ve observed that solvency and liquidity has improved, however profitability remains a concern due to low rates, the impacts of China’s slow down and low commodity prices on expected growth levels.
Are we facing the danger of a new global recession cycle which will refer to the crisis of 2008?
Looking at 2016, we expect another year of stable, yet subdued global growth.
We project G20 GDP growth at 2.6% in 2016, similar to last year and rising to only 2.9% in 2017.