- Political stability
- Fiscal affairs
- Monetary policy
- Regulated markets
- Privatisation
- Macroeconomic developments
submited on 04.08.2013 in category Regulated markets | Fiscal affairs | Privatisation | Political stability | Monetary policy | Macroeconomic developments
In the regular annual macroeconomic report from the summer of 2012 we warned that most European economies are just beginning to show results induced by austerity measures and restructuring of the banking sector. Our analysis from June 2013 focused on the entry of Europe into a new recession and the related decline of key macroeconomic parameters, which increased the risk of lowering the credit rating of institutions in the region.
From 2011 until now the only EU countries to have their government debt rating increased are Bulgaria and Latvia, according to the scale of Moody's. Countries in Central and Eastern Europe (CEE) as a whole managed to keep their rating intact with the exception of Hungary and Slovakia, where there is a reduction by one notch. For the past six months, however, the ratings of five municipalities in the region were reduced without a single upgrade.
At the same time, the agencies more often reduce the prospects and rating of banking institutions. For example, Moody's has decided for 397 credit downgrades of European banks in the past 12 months with only 142 cases of promotion. One reason for the more conservative estimates of Moody's and Standard and Poor's of the risk in the European financial system is the ongoing debt crisis and the euro zone entering a new recession in the second half of 2012. In the list compiled by Standard and Poor's of financial institutions whose ratings can be reduced, 111 companies worldwide are included, of which 66 are based in Europe.
The downgrades of financial institutions are more frequently observed in CEE countries compared to the average for the continent. Thus, despite their better performance CEE banks are placed in a group with financial institutions in Eurozone member states which are in danger of fiscal and / or banking crisis. Agencies justify their decisions with strong integration between banks and potential contagion, and with the weak economic performance, deterioration in asset quality and lower demand for new loans.
The figures, however, indicate that the macroeconomic picture in CEE is more optimistic. GDP growth in 2012 was the highest in this part of Europe, and even after the entry of the "core" of the European economy into recession in early 2013, the only economies with growth in the first quarter remained Baltics, Romania Bulgaria, Poland and Slovakia.
Although the financial crisis hit new EU member states faster and sharper the crisis was managed with prompt action. Negative effect of austerity in the region is largely consumed, unlike many countries in "Old Europe" where this process has just begun last year. Banks in Eastern Europe have good capitalization and high liquidity and are significantly less exposed to the real estate sector compared to most countries in the euro area (please, see the chart).
Nevertheless, the rating agencies still remain pessimistic about the economic landscape in CEE. According to them, the possibility of new budget cuts could lead to further contraction of consumption and income, which carries some risk for the banking system despite significant capital buffers.
Banking regulators and governments in the region should exercise extreme caution at every step because the ratings still have a serious impact on access to fresh capital and financing costs. Despite having good economic and financial indicators, CEE countries should be more cautious in their actions than countries in a similar situation in Western Europe.
Since the focus of rating agencies is the quality of the assets and risks of further losses and additional delinquency-related costs, governments and regulators should ensure reliable and predictable mechanisms for resolving disputes between creditors and debtors, including by improving the efficiency of judicial system. On the other hand, we should carefully analyze the various ideas for short-term extension of the so-called "Rights of the debtor," which could create difficult and costly barriers to dispute resolution and hence – put at risk the assets of the banking system.
The full report (in Bulgarian) is available here