The Strategist

Moody's ringing alarm bell: Europe is not ready for a new crisis

10/16/2018 - 15:24

Moody's rating agency published a report in which it points to lacunae in the European financial system. Besides, the report also draws attention to the sovereign parties.

derek4ukip via flickr
derek4ukip via flickr
According to Moody's, Europe is “not ready to face a new strong braking that will be a test for the financial system in any case.”

And this is despite the fact that “after the last recession, issuers have benefited from credit conditions, and banks have strengthened their financial reliability.”

The rating agency published a report in which it lists the lacunae of the European financial system and the problems that could cause a new financial crisis. Many have feared this lately. “Despite the improvements that have occurred since 2008, Europe remains economically vulnerable, because debt load has grown, fewer tools are left to support recovery, the cost of financial activity has increased, the number of political risks and regulations is increasing, and innovative technologies are becoming a test for an increasing number of sectors” - said Paolo Leschiutta, senior vice president of Moody's. The agency’s Head also added that “in general, the leeway for reducing the effects of another recession is decreasing.”

According to the economists who worked on the report, we have seen a very high level of private debt in the last ten years. This fact is additionally leveraged by high and, importantly, rising levels of public debt, which in combination with the aging of the population can be fraught with problems. 

“Government and central bank decisions that are helping to recover from the last crisis have reduced the chances of confronting the likely new deterioration of the economy,” Moody's report says. The paper also states that “monetary stimulus policies produce fewer results; frequent cost reductions at the local level complicate the further reduction and strengthening of the state budget. In addition, the economy continues to stagnate, which limits the rate of recovery after the recession.”

A stern note of further warning is given to the sovereign and so-called populist parties that are gaining popularity. “Low growth and high unemployment rates exacerbate insecurity in some countries, contributing to the development of opposing establishment movements that may become even more popular if a new crisis breaks out. Politicians may decide to abandon previous support measures or increase protectionism,” an analyst of the international rating agency explained in the report.