By Natassa Stasinou 

 

 

European Central Bank’s fight against inflation will not be easy and Eurozone rates will keep rising for a long time, reckons Nichola James, Co-head of Sovereign Ratings, DBRS Morningstar. In an interview with Naftemboriki, she sounds the alarm for a recession in the Eurozone, while pointing out her concern about the high levels of private debt. In this challenging environment Greece still has a chance to be upgraded to “investment grade” by rating agencies. But it will have to make sure that it doesn’t deviate from the path of reforms. 

 

“While we expect the consumer price index (CPI), which is rising mainly due to energy prices, to gradually slow, the pace of the slowdown will depend on whether the decline in natural gas prices lasts and the extent to which inflation will ‘pass’ on wages. The ECB’s key interest rates will continue to rise until the medium-term target of 2% inflation becomes visible - which may not happen before 2024,” says Ms. James. 

 

High inflation could push Eurozone economy in recession, she warns. “Households and businesses ‘cut’ consumption and investment. This reflects higher borrowing costs, falling real wages and squeezed profit margins for many businesses. In Greece, the positive economic effects of the post-Covid tourism boom could be unsustainable if domestic and foreign visitors drastically reduce non-essential spending in 2023,” she explains.

 

A new debt crisis is a possibility, DBRS estimates, although for now they are more concerned about high nominal levels of borrowing by vulnerable households and companies, amid rising interest rates on fixed-rate loans and loans in need of refinancing. Debt service data by most measures remains healthy overall. If market rate hikes accelerate rapidly in Europe, as they have recently in the UK, this would be more of a concern. For now, Eurozone governments are more protected, given the long maturities of public sector debt that limit the immediate impact of higher interest rates on their debt portfolios.

 

According to Nichola James, a Greek credit rating upgrade to investment level is contingent upon: (1) continued implementation of reforms that boost investment, thereby improving longer term economic prospects; (2) sustained commitment to fiscal consolidation that keeps the public debt ratio on a downward trajectory. To the extent that the current adverse economic environment forces government priority away from structural reforms and reduces the up-to-now strong commitment to returning to primary surpluses, the challenging environment could be a hindrance.