NEW YORK--(BUSINESS WIRE)--Kroll Bond Rating Agency (KBRA) has released a report commenting on monetary policy developments in the Eurozone with respect to sovereign credit risk. The report makes the following key points:
- Discussion is heating up about Q.E. tapering and interest rate hikes in the Eurozone.
- Debate on normalization underscores improved macro conditions in this group of countries, though unevenness exists.
- This environment provides the backdrop for KBRA as we develop a methodology for rating sovereigns.
The report notes that the European Central Bank (ECB) may be just a few steps behind the Federal Reserve Bank on a path towards monetary policy normalization, as discussions are heating up about ending quantitative easing (Q.E.) and raising interest rates. The inflection point provides the backdrop for the fundamental credit analysis that characterizes KBRA’s approach to sovereign ratings.
Normalization may indeed be credit supportive, because it suggests a return to stability and less uncertainty. However, it does introduce uncertainties. The one-size-fits-all approach is unable to address the asymmetries across the bloc. GDP growth and inflation performance vary country-to-country, with those that have undertaken the most extensive structural reform programs generally faring best.
As KBRA is currently devising its methodology for rating sovereigns we are thinking about the example provided by ECB Q.E. and what it means for sovereign risk. On the one hand, the ECB’s commitment to “do whatever it takes” has been critical to the stability of the Eurozone. On the other hand, the intervention has essentially put a band aid on the problems that caused the crisis in Europe, even though it has given beleaguered economies space to restructure and adjust. The phasing out of intervention will increase the importance of core, credit analysis for Eurozone economies, while de-emphasizing emergency liquidity support.
According to the report, KBRA’s ratings of European sovereigns will likely span much of the rating scale, closely mapping indebtedness levels, as well as economic performance and institutional capacity. Incomplete structural reform is a factor that may mar KBRA’s view on several countries in the region due to the impact on GDP growth, unemployment reduction, government finances, and the policy and political environment. Strong or strengthening competitiveness and efficiencies that generate handsome economic gains will likely positively influence KBRA’s sovereign Eurozone analysis.
KBRA’s full report on the topic, entitled, “EZ Monetary Policy Normalization and Sovereign Ratings” is available here.
About Kroll Bond Rating Agency
KBRA is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (NRSRO). In addition, KBRA is recognized by the National Association of Insurance Commissioners (NAIC) as a Credit Rating Provider (CRP).