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Europe will be 'more exposed' in the next economic downturn

Publication Date: 08 Oct 2018 - By Gaurav Sharma (Associate Editor ReachX) By Gaurav S.

Environmental, Social & Governance Macro FX & Rates FX Fixed Income/Credit Multi Asset UK EU


Despite issuers benefiting from benign credit conditions and banks having strengthened their balance sheets since the last downturn, Europe is not ready to cope with another major slump stressing the financial system, according to an industry report. 

In a note to its clients, rating agency Moody’s opined that while there have been some improvements since the global financial crisis of 2008-09, Europe remains vulnerable in economic terms as debt loads are higher. 

“There are also fewer tools to aid recovery, asset prices are peaking, political and regulatory risks are rising, and disruptive technologies are affecting more and more sectors," said Paolo Leschiutta, Senior Vice President at Moody's.

"Overall, the amount of wiggle room available to mitigate the impact of another downturn is shrinking," he added.

Moody’s said private debt levels have remained at a historically high level in the last decade, leaving many issuers more exposed should interest rates rise sharply and remain high. “High and increasing public debt levels will also leave a number of European countries exposed to the next recession and the impact of costs associated with ageing populations,” the agency added.

“,Government and central bank actions taken to aid recovery from the last downturn have limited the options at their disposal to counter the next economic decline. Monetary stimulus is having diminishing returns, and successive rounds of sub-sovereign measures make further cuts and budget consolidation more difficult. Moreover, economic growth will remain sluggish, limiting the speed of recovery following a recession,” Moody’s noted further. 

Elevated prices mean some assets and financial markets are at risk of a sudden correction if interest rates rise quickly, beyond market expectations. For corporates, high multiples and asset valuations increase M&A execution risks because companies overpaying for deals might find it harder to reduce debt.

Moody’s also warned that low growth and still high unemployment in some European jurisdictions fuel economic insecurity, fostering anti-establishment movements, which could further rise in popularity if another crisis erupts. Even mainstream policymakers could intervene to withdraw previously assumed support or increase protectionism.

Rapid technological change is also disrupting a number of sectors and creating new sources of competition, with laggards weaker in the event of a downturn, it concluded. 


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