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Financial Mirror (Cyprus) - - FRONT PAGE -

A grad­u­ally re­cov­er­ing global econ­omy will support con­tin­ued sta­ble credit qual­ity of the world’s sov­er­eigns in 2015, Moody’s In­vestors Ser­vice said in its an­nual Global Sov­er­eign Out­look. How­ever, the rat­ing agency sees four risks on the hori­zon that could in­ter­rupt growth and un­der­mine sov­er­eign cred­it­wor­thi­ness across the globe.

“While the over­all credit out­look for sov­er­eigns around the world is sta­ble for 2015, it is vul­ner­a­ble to a set of shared risks, al­beit to dif­fer­ent de­grees in dif­fer­ent re­gions. The prin­ci­pal ones are the pos­si­bil­ity of con­fi­dence shocks from the ex­pected rise in US in­ter­est rates, es­pe­cially in the case of a disor­derly mar­ket re­ac­tion, the im­pact of lower growth in China and the euro area, the over­hang of geopo­lit­i­cal risks, and re­form fa­tigue,” said Alas­tair Wilson, head of Moody’s Global Sov­er­eign Risk Group.

“On the pos­i­tive side, global GDP growth is likely to con­tinue at a steady pace in 2015, though at lower lev­els than be­fore the cri­sis,” con­tin­ued Wilson.

A ma­jor driver of sov­er­eign cred­it­wor­thi­ness will be the ex­pected nor­mal­i­sa­tion of US mon­e­tary pol­icy. While higher US growth should im­ply pos­i­tive eco­nomic con­di­tions for sov­er­eigns across the globe with trade links to the strength­en­ing US econ­omy, nor­mal­iza­tion poses risks should mar­ket par­tic­i­pants come to fear that the process will be a disor­derly one, Moody’s said. That would pose risks to sov­er­eigns in the euro area and to emerg­ing mar­kets that are highly in­debted and re­liant on con­fi­dence-sen­si­tive cap­i­tal flows. For ex­am­ple, higher US in­ter­est rates could en­cour­age Euro­pean and in­ter­na­tional in­vestors to re-bal­ance their port­fo­lios in favour of US debt at the ex­pense of Euro­pean bonds at a time when yields on Euro­pean sov­er­eign bonds are at his­tor­i­cal lows.

In ad­di­tion, while Moody’s ex­pects in­fla­tion to re­main in pos­i­tive ter­ri­tory on av­er­age across the euro area through­out 2015, low real growth and de­fla­tion­ary risks will con­tinue to weigh on sov­er­eign credit pro­files in the re­gion. The Euro­pean Cen­tral Bank’s will­ing­ness to ex­pand its bal­ance sheet is credit sup­port­ive, but its abil­ity to stim­u­late growth and in­fla­tion at the cur­rent junc­ture is limited.

Euro area growth will also likely be linked to global growth, given the con­tin­ued weak­ness of do­mes­tic de­mand and de­pen­dence on ex­ter­nal de­mand and world trade. Moody’s ex­pects Chi­nese growth, one of the driv­ers of global GDP, to be be­tween 6.5% and 7.5% in 2015. But a slower than ex­pected ex­pan­sion would fur­ther un­der­mine global eco­nomic prospects. Sub-Sa­ha­ran Africa could also be neg­a­tively af­fected by a sharper-than-ex­pected slow­down in Chi­nese de­mand or fur­ther de­te­ri­o­ra­tion in com­mod­ity prices, re­sult­ing from com­mod­ity ex­porters’ sig­nif­i­cant trade link­ages and China’s sig­nif­i­cant con­tri­bu­tion to some African coun­tries’ for­eign di­rect in­vest­ment. Moody’s also noted that geopo­lit­i­cal risks, such as those posed by the Rus­sia/Ukraine cri­sis and the tur­moil in the Mid­dle East, will con­tinue to pose a threat to in­vestor con­fi­dence in the af­fected coun­tries and neigh­bour­ing re­gions. Nev­er­the­less, bar­ring a sig­nif­i­cant es­ca­la­tion in ten­sions that has a broader im­pact on con­fi­dence, cap­i­tal flows and growth, the rat­ing agency ex­pects that the im­pact on sov­er­eign cred­it­wor­thi­ness will con­tinue to be limited to those gov­ern­ments in clos­est prox­im­ity to each cri­sis.

Fi­nally, gov­ern­ments across the world have iden­ti­fied struc­tural re­forms needed to en­hance medium term growth. Their suc­cess will be an im­por­tant medium term credit fac­tor and, more im­me­di­ately, a driver of in­vestor con­fi­dence. At the euro area level, the ab­sence of fun­da­men­tal re­form to ad­dress the gaps in fis­cal and eco­nomic gov­er­nance that the cri­sis laid bare also re­mains an im­por­tant con­straint on sov­er­eign rat­ings. Th­ese gov­er­nance gaps rep­re­sent a po­ten­tial source of risk, should in­vestor sen­ti­ment be­gin to turn more neg­a­tive in re­sponse to other shocks.

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