February 27, 2021

Moody's warns that high debt and lack of fiscal space make Europe more vulnerable to another crisis

Moody's warns that high debt and lack of fiscal space make Europe more vulnerable to another crisis


The credit rating agency Moody's has warned that high levels of debt, lack of stimulus instruments, less fiscal space, the rise of populism and technological disruption leave Europe in a "vulnerable" position if it is produce a new economic crisis.

"In general, the amount of maneuvering space available to mitigate the impact of another economic crisis is shrinking," Moody's Senior Vice President Paolo Leschiutta said in a report published on Monday.

Specifically, the firm has warned that since the last financial crisis, debt levels have remained at a "historically high" level, which leaves debt issuers "exposed" in the event that interest rates go up. "abrupt" way.

"A high level of public debt will also leave a number of European countries exposed to the next recession and the impact of the costs associated with aging populations," Leschiutta said. "In fact, those countries that least needed to reduce their debt, such as Germany or the Netherlands, have made the greatest progress," he added.

In the case of Spain, Moody's has warned that a sudden rise in interest rates represents a risk for Spain, since the financing of the Autonomous Liquidity Fund would be "reduced".

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On the other hand, given that during the last decade European governments and central banks have taken measures designed to "boost the recovery", in case of a new economic shock, the availability of stimulus instruments is more "limited". "In addition, economic growth will be slow, which will limit the speed of recovery after a new recession," Moody's has warned.

In relation to the stock markets, the rating agency has indicated that asset prices are at a "high" level, which could lead to a "sudden correction" if interest rates rise at a faster rate than what is expected. wait for the market.

"For companies, the high value of assets multiplies the risks associated with mergers and acquisitions, since companies that pay more than the account for their transactions will find it more complicated to reduce their debt," Leschiutta said.

Also, the low growth and high level of unemployment in some countries could lead to the rise of 'anti establishment' movements. In the opinion of Moody's, these new governments could promote measures contrary to the economic consensus or even a deepening economic protectionism initiated by the Executive of Donald Trump in the United States.

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