ECR risk experts contemplate another financial crisis


Jeremy Weltman
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As coronavirus puts Europe in lockdown, with no indication of how long it might last, contributors to Euromoney’s risk survey are scrambling to re-jig their assessments and make sense of all the fear, panic and uncertainty.

The eurozone finds itself at the centre of the coronavirus pandemic and facing the economic consequences


Euromoney’s first-quarter risk survey will be like no other since the global financial crisis of 2007/08 pushed sovereign borrowers to the brink of default. That much is guaranteed.

Already experts are lowering their risk scores – quite dramatically – mostly for economic, but also for political and structural risk factors, highlighting the broad and interlinked effects of country risk.

The final results will not be available until early April, but the survey’s contributors are already having their say on how it will affect their scoring, notably in terms of the eurozone, which has now found itself at the centre of the pandemic.

Eurozone risk ECR -780

One of those contributors is Constantin Gurdgiev, a professor at the Middlebury Institute of International Studies and Trinity College Business School, who has indicated the key economic risks relating to potential growth prospects and banking sector stability clearly warrant substantial downward revisions for core European economies.

“Fiscal pressures are rising across the board and can be expected to become unsustainable, unless the EU and the ECB step in to address the need for non-debt financing of crisis mitigation measures,” he says.


Another contributor, Norbert Gaillard, an independent sovereign risk analyst, plans to downgrade various sub-factors for Germany, France, Italy, Spain and the UK, including the access to capital markets indicator, as liquidity problems surface despite the central banks’ response.

“The most important issues are the credibility of the lenders of last resort (the governments and central banks) and the cooperation between G7 or even G20 countries,” he says.

“These lenders of last resort should intervene to prevent a systemic crisis, but at this time there must be equity participation. Force majeure is being invoked in various contracts (regular business contracts, derivatives contracts, etc), which means that financial crisis could spread in the next weeks.”

Gaillard says he plans to downgrade Spain and Italy a lot.

In Italy, where the economy was already weak, it is now expected to nosedive. Spain will tumble too, as will Germany, France and the UK, as European countries experience recession.

Euro Zone Barometer, a monthly survey of independent economic forecasts, is flagging up real-terms declines of 3%, or even as high as 6% for Italian GDP this year so far, with the forecasts for other countries not far behind.

Unemployment rates will rise, fiscal deficits widen, and debts climb – storing up big problems to be resolved once the crisis is over.

But when that will be is not clear, given that it will likely depend on finding and testing a vaccine and manufacturing it in large enough quantities to inoculate millions of people.

Euromoney’s survey already shows sharp falls in scores for many risk indicators and, worryingly in Italy’s case, for government finances and bank stability.

Gurdgiev believes core euro area economies “will require between 10% and 17% of their GDP in terms of direct and indirect supports for households and the non-financial corporate sector over the first three months of the crisis, with full-year 2020 impacts likely to range between 16% and 27% of annual economic output.”


These measures will come on top of the direct economic contraction of 4% to 5% in annual GDP to be experienced this year. As a result, the policy formation structures in Europe will be severely tested by the crisis, driving down both tangible investment and fiscal sustainability buffers.

“The knock-on effect of this will likely be further fragmentation of the EU across member states' responses to the crisis and across the sectors of the economy, with the financial services sector (especially the banks) absorbing the largest share of economic crisis management measures and supports.”

Survey contributor M Nicolas Firzli, a director of the World Pensions Council and advisory board member at the World Bank Global Infrastructure Facility, refers to it as “the greater financial crisis” and says it is bringing to the surface many pent-up financial and geopolitical dysfunctions.

“So far, the only European countries forced to put in place short-selling bans are Italy, Spain and France: three of the four largest economies in the enfeebled European Union.

He believes the financial vulnerability of Madrid, Milan and Paris is due to an often-overlooked geo-economic reality, which he believes will come to the fore in the coming days.

“By OECD standards, Spain, Italy and France have very weak pension assets bases. Their combined pension wealth is more than 15 times smaller than that of jurisdictions such as the UK or Australia.

“In times of acute crisis, like today, they lack cash-rich domestic buyers of last resort for the bonds and equities traded on their financial markets. Their national economies will suffer as a result, and their political sovereignty itself may be severely eroded.”


Gurdgiev meanwhile assesses smaller economies, and compares Estonia with Ireland. Estonia stands out as potentially the more robust economy in this crisis, he believes.

“This is due to the fact that Estonia has successfully transformed itself into a digital services powerhouse, and has managed to significantly modernize its economy in manufacturing and industrial sectors, with major productivity gains in agriculture.

“As a result, the country is far less exposed to the temporary shutdown caused by the coronavirus pandemic than other European economies."

Ireland, on the other hand, will be downgraded a lot and hit hard on the domestic employment front, with a majority of Irish indigenous employers exposed to high leverage risks (both in operational and financial leverage terms).

“Through its multinational sector exposure," Gurdgiev says, "Ireland is also vulnerable to the shocks arising from the collapse in global demand. Perhaps the only exception to this rule can be found in the Irish pharma and medical devices sector – heavily dominated by the multinationals."

Gurdgiev also touches on the political ramifications. The lack of stable government is another area of vulnerability for Ireland, with the last election producing no functional or feasible prospects for a stable governing coalition.

The economic shock is one thing, the political fallout will be even larger once it dawns on voters who will be picking up the bill. 

Whatever happens, it seems that Euromoney’s risk survey is likely to become more crucial than ever for the foreseeable future.