dimitrijevic2_YANN SCHREIBERAFP via Getty Images_ecb covid YANN SCHREIBER/AFP via Getty Images

Why This Time Really Is Different for Europe

Europe’s policy response to the COVID-19 economic crisis has increased budget deficits and public debt but so far cushioned the potential blow to sovereign ratings. The post-pandemic ratings trajectory will depend on governments’ ability to deliver sufficient economic growth to restore fiscal balances.

LONDON – From a European sovereign credit-risk perspective, the COVID-19 pandemic differs from other recent crises. First, the current economic crisis arose from recession-inducing lockdowns to combat a viral contagion, rather than from an asset-market contagion caused by a failing financial system. Second, Europe’s policy response has been far more robust than previously. Once the pandemic ends, the trajectory of European sovereign ratings will depend on governments’ ability to deliver sufficient economic growth to restore fiscal balances.

Our own sovereign rating actions since March 2020 have taken into consideration the nature of the shock triggered by this public-health crisis – massive, but exogenous and temporary – and how well countries have been able to respond to it. For now, monetary and external flexibility as well as economic resilience are better indicators of sovereign creditworthiness than a country’s debt-to-GDP ratio.

Globally, we have downgraded nearly a quarter of the sovereigns we currently rate. Most are lower-rated emerging- or frontier-market borrowers that had pre-existing vulnerabilities and less financial resilience and flexibility to deal with COVID-19 and its economic consequences. This includes seven defaults, all by sovereigns that were at the lower end of our rating scale (“B” or below) before the pandemic.

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