By Andreas Charalambous and Omiros Pissarides
Globalisation and the expansion of world trade and foreign investment have demonstrated the clear need for an objective and technocratically substantiated assessment of national economies. In this context, the importance of rating agencies as institutions for analysing the comparative advantages, challenges and future prospects of national economies has evidently come to the surface. The reports of international organisations, such as Moody’s, Standard & Poor’s and Fitch, now have crucial influence on the decisions of international investors and, consequently, on the economic policy of sovereign states.
On a practical level, states recognise that a negative rating has significant adverse impacts on attracting foreign investment and leads to higher borrowing costs in the government bond markets. This is especially true in the case of the Eurozone, where the existence of a single currency does not allow individual states to exercise a national monetary policy. With fiscal policy as their primary tool, member states should strive to ensure conditions for socio-economic growth and stability on the basis of a long-term sustainable budget. Otherwise, excessive spending leads to growing public debt which deprives the economy of valuable resources and limits the ability to respond effectively in times of economic downturn and emergencies.
The need to maintain sustainable public finances in the long run is fully compatible with an expansionary fiscal policy during times of recession. It is for this reason primarily that the recent decisions of the heads of the member states and the ambitious plans under the “EU Next Generation” programme, through which 750 billion euros will be channelled to the member states, were welcomed by the rating agencies and investors. This specific EU programme aims to provide the resources for a Europe based on the principles of social solidarity and one that’s in a position to undertake a leading role towards combating climate change and technological improvement.
In Standard & Poor’s recent assessment of the Cypriot economy, the sovereign credit rating was maintained at investment level with a stable outlook. It appears that, despite the negative consequences of Covid-19, the rating agencies have maintained their confidence in Cyprus and approve its handling of the situation so far. However, this should not lead to complacency. The reports of the rating agencies also highlight long term structural weaknesses, such as the existence of sizeable public and private debt, the high level of non-performing loans, the increased probability of bankruptcies when the instalment moratorium period ends, and the dependence of the economy on a small number of sectors which are vulnerable to external shocks.
The reality is that there are no easy ways to deal effectively with persistent and deep-running problems and weaknesses. However, proper utilisation of the opportunities afforded by “EU Next Generation” can help not only to address the social problems created by the pandemic but also to adapt to tomorrow’s demanding times, without affecting the long-term sustainability of public finances which remains the key to positive evaluations by rating agencies and investors.
Andreas Charalambous is an economist and former director of the Ministry of Finance
Omiros Pissarides is the CEO of PricewaterhouseCoopers Investment Services