Cyprus Mail

Moody’s says Greek euro exit would change nature of euro

By Shrikesh Laxmidas

A Greek exit from the euro would not mark a return to the debt crisis of 2012, but it would create risks of contagion and change the nature of the monetary union, which was supposed to be permanent, a senior Moody’s rating analyst said on Thursday.

“We don’t think that a Greek exit would be inconsequential,” Kathrin Muehlbronner, vice-president of sovereign risk at Moody’s told Reuters in an interview in Lisbon.

Many analysts worry that Greece will be forced to leave the euro zone if it fails to reach agreement with its creditors and receive more funds.

“It (a Greek exit) would change the face and the nature of monetary union, which was supposed to be permanent and would then turn out not to be,” Muehlbronner said, adding that Portugal would be at risk of contagion in the case of a Greek exit.

She said the impact of a Greek exit would be limited by the European Central Bank’s quantitative easing programme but might hit corporate operations.

“It’s unclear how it would play out,” she said. “The sovereigns in a way are protected by the ECB’s QE. It’s less certain about bank funding and corporate funding and their ability to access markets.”

The ECB’s programme has provided a “huge help” to the eurozone and will continue to have a large influence on interest rates until September 2016, when the plan ends.

“So interest rates will remain anchored at very low levels, but they can now only go in one direction, which is up,” she said.

The ECB’s programme has also reduced pressure on governments, she said.

“With interest rates so low and funding conditions improving, the pressure has been taken off governments to pursue aggressive fiscal policy measures. That’s clear for the whole eurozone,” she said.

Moody’s rates Portugal Ba1 with a stable outlook – the first notch of speculative grade.

Muehlbronner said Portugal’s rating was held back by the country’s large debt burden. At around 130 percent of GDP, it is the fifth highest in “our entire sovereign rating unit.”

“We do expect the debt to start declining this year, but even assuming fiscal consolidation, growth, you would still be looking at a ratio of 115 percent or so by the end of the decade,” she said.

Portugal’s rating is also undercut by the country’s poor growth after its debt crisis – Lisbon exited a bailout last year, when it grew 0.9 percent after three years of recession.

“Just 1 percent growth following the recent crisis brings up question marks and the possible option of additional reforms to help with the growth performance,” she said, adding she expects higher growth this year.

She said that Moody’s wants to know what fiscal policy will be like under the next government, after elections in the autumn.

“We think there is a need to continue with proactive fiscal measures, the cyclical recovery is too weak to take care of the budget issues by themselves,” she said.

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