Exit Risk Low in Euro Area, but Could Rise This Year

The chance of a country other than Greece choosing to leave the European Union is low, but could increase as the year proceeds due to the rise of anti-EU parties in the area.

In a new report on how euro-area risk is reflected in its ratings, Moody’s Investors Service said that such parties, though unlikely to gain enough electoral support to seek exit from the euro area, might still influence political agendas. The report addresses how the ratings agency would determine that a departure from the union, if followed by a currency redenomination, was a default. Such a scenario would not automatically result in a default. Moody’s said it would focus on changes in the value of debt obligations relative to the original contractual promise. If investors were offered securities of diminished value relative to the original, then it would conclude that a default had occurred.

Exit risk is indicated in Moody’s euro area bond ratings and euro area country ceilings. The country ceilings mainly reflect the risk of a country exiting the union and redenominating all domestic debts into a new, weaker currency.

“Ultimately, the single currency is a political construct that relies on sustained popular support among member states,” said Colin Ellis, chief credit officer at Moody’s. “Any evidence that such popular support was waning in key member states could weigh on popular support elsewhere in the euro area, increasing credit risks.”

– Adam Fusco, editorial associate

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