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Rating of euro area members unlikely to change till 2017, Moody’s says

Moody’s Investors Service said that the sovereign ratings of euro area members are likely to remain stable in 2016 and 2017, citing weakening fiscal consolidation, a slowdown in reforms, and political uncertainty.

“The credit quality of euro area sovereigns is supported by moderate economic growth and stabilizing debt to gross domestic product ratios,” the rating company said in an emailed statement on Friday, citing the findings of a report. “The main downside risk is of much lower than expected growth in China damaging the global economy, but this is not Moody’s baseline scenario”.

Thorsten Nestmann, a Moody’s vice president – senior analyst, who was the lead author of the report, said that the rating company expects that the European single currency bloc’s economy will grow this year around 1.5 per cent.

“While that is low by historical standards, it will support euro area sovereigns’ credit profiles over the coming year or so,” Nestmann said. “However, we see little upside to ratings, and a number of clouds gathering”.

The euro area’s low growth rate, combined with an inflation rate of around 0% this year, will make a reduction of the debt to GDP ratio more difficult, Nestmann continued, adding that the rate of consumer price increase is expected to speed up to 1 per cent next year.

“The longer inflation stays low, the longer the deleveraging process will take and the longer the euro area economy will be vulnerable to negative shocks,” the Moody’s senior analyst said.

Political support for structural reforms has weakened both at national and euro area level in an increasingly “unpredictable political landscape,” with the European Union trying to deal with the current refugee crisis, and Britain preparing for a referendum that will determine whether it will remain a European Union member, Moody’s said.

“Given low inflation and reduced structural consolidation, Moody’s expects only a very gradual reduction in euro area sovereigns’ debt levels in the years prior to 2020,” Moody’s said.

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