Moody's: Portugal would be one of the countries most at risk to cut debt in the event of stagnation in the eurozone

In an environment of long-term low growth and persistently low inflation, eurozone sovereigns would have a harder time reducing debt, says Moody's, which in a report identifies Portugal, Greece, Italy and Cyprus as the countries most at risk.

The pandemic increased the risk of economic stagnation for the eurozone, in a scenario that would raise challenges particularly for countries like Portugal, which would have greater difficulties in reducing public debt. The portrait is from a report by the credit rating agency Moody's, which parallels the Japanese experience in the 90s, but finds essential differences.

“In an environment of low growth and persistently low inflation, eurozone sovereigns would have a harder time cutting debt. Portugal, Greece, Italy and Cyprus would be at greater risk, while Germany and the Netherlands would be better positioned ”, says the report“Covid-19 will reinforce credit-negative risks of secular stagnation in the euro area“, Published this Wednesday.

In a scenario of economic stagnation, the agency warns that eurozone banks would have a harder time preserving profits, which would increase the effects of weakening asset quality, while companies would have increasing challenges with falling profits and a delay in deleveraging.

"The slow economic growth in domestic markets would probably lead companies in the long run to look at M&A in the long run in search of external growth or cost synergies," say the analysts.

The Moody's report emphasizes the pandemic's impact on the risk of stagnation in the eurozone, considering the potential for even slower growth in the long run and a longer period of extremely low interest rates, driven by factors such as a new increase in savings on investments.

This scenario leads the agency to reflect on possible comparisons with the Japanese case in the 1990s, however, Laura Perez, from Moody's and author of the report, points out that “in the case of the euro zone entering a scenario similar to that of Japan, the implications in credit in all sectors would generally be negative. However, the magnitude of the effects would be very different ”.

“Although the eurozone has experienced low growth and very low interest rates driven by secular factors that were largely similar to those of Japan in recent decades, there are differences. The most important difference between the two regions is related to the structure of the euro zone, according to which countries share a single currency and effectively a fixed exchange rate with each other ”, highlights the report.

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