Europe Economy

Euro zone government debt given 'negative' outlook by Moody's

Key Points
  • While the annual report is an update to the markets and not a formal ratings action, it highlighted a number of factors which heighten the risk of investing in the debt of euro area economies in 2020.
  • Moody's determined that political fragmentation in many countries is hindering reform and will likely slow policy responses to domestic or external shocks.
The 'Euro Bridge' sound and light show followed by fireworks introduces the launching of the euro 01 January 2002 on the esplanade of the Cinquentenaire park in Brussels.
OLIVIER MATTHYS | AFP | Getty Images

Ratings agency Moody's has issued a "negative" annual outlook for sovereign creditworthiness in the euro area for 2020, downgrading the bloc from "stable" this time last year.

The report published Tuesday cited the "deteriorating global environment" and suggested that euro area economies are vulnerable to rising protectionism and geopolitical risks, with their ability to handle economic shocks inhibited.

While the annual report is an update to the markets and not a formal ratings action, it highlighted a number of factors which heighten the risk of investing in the debt of euro area economies in 2020.

Moody's determined that political fragmentation in many countries is hindering reform and will likely slow policy responses to domestic or external shocks, with minority and multiparty coalition governments becoming the new norm and political divergence increasing at the EU level.

"Our negative outlook for the euro area reflects most member states' limited buffers to react to a worsening external environment," said Kathrin Muehlbronner, a Moody's senior vice president and the report's co-author.

"The deteriorating global environment will weigh on growth in member states' open economies in 2020, although resilient domestic demand, easy monetary policy and some fiscal easing will mitigate the impact."

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Still high public debt ratios are also projected to restrict governments' fiscal room to maneuver in the event of a sharp slowdown, with monetary policy "close to having exhausted its effectiveness," according to the report.

"Many euro area sovereigns — specifically Belgium, Cyprus, France, Greece, Italy, Portugal, and Spain — have debt ratios around 100% of GDP (or significantly higher in some cases), which is unprecedented for the last few decades and significantly constrains their ability to use fiscal policy to cushion a sharp slowdown in growth," Moody's report said.

"Debt ratios in France and Italy continued to rise from high levels last year, reaching an estimated 99% and 135% of GDP, respectively."

Weak global trade is expected to continue to stymie exports and growth, while Germany's industrial weakness will spill over into the rest of the euro area. Moody's expects tepid GDP (gross domestic product) growth of 1.2% for the euro area in 2020, compared to 1.1% in 2019.

In September, the European Central Bank deployed a massive stimulus package, including a substantial and unlimited quantitative easing program and a further cut to its main deposit rate, in a bid to stimulate the euro area economy.

Germany's benchmark 10-year bund yield was down at 0.2070% on Tuesday morning, while bond yields in the U.K., Italy and France also edged lower.

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