MNI INTERVIEW: EMU Ratings Likely Untouched By QE Unwind: DBRS

By Jamie Satchithanantham

     LONDON (MNI) - As long as the European Central Bank acts in a 'sensible'

manner, the prospective unwind of quantitative easing should not pose a threat

to Eurosystem ratings, a senior sovereign debt strategist at a leading credit

ratings agency has told Market News.

     "Our overall assumption is that ECB will be sensible with this and won't

want to trigger a crisis it has devoted so much time and money to avoid," said

Nichola James, Co-Head of Sovereign Debt at ratings agency DBRS.

     Though the ECB's landmark bond purchasing programme, which to date has so

far amassed European bonds worth in excess of E2.0tn, is still expanding, the

general consensus is that the programme will likely end sometime in the next

year to 18 months. 

     With the level of indebtedness varying across all 19 member states -- in

2016 government debt to GDP was as high as 133% in Italy but only 68% in Germany

-- ending the ECB's QE programme will bring about challenges unique to each

state. Some fear the gains made via the programme could shift into reverse. 

     "There's a trade-off. In some countries they are going to have faster

growth than others, be more able to withstand [headwinds], and the ECB has to

act on an average. It can't please every economy. So, some economies are going

to be disadvantaged with lower growth and inflation," she said. 

     A few key factors, according to James, would be examined that could have

the potential to drive a change in a credit once the unwind commenced. 

     "We'll be looking at the change required in the primary surplus to cover

those interest rate costs, assuming no other change in fiscal policy, and how

well countries can politically withstand that squeeze because it will

potentially lead to some future tightening," she said. 

     "The other [factor] we'll look at it, for these highly indebted countries,

is when they are going to stabilise and start reducing their debt ratios," she

added.

     James' overall feeling was that if managed responsibly the unwind of QE --

a hot topic after this week's ECB policy meeting -- would probably not place

downward pressure on Eurosystem sovereign ratings. That said, it warranted more

analysis and she conceded some sovereigns may find themselves under pressure. 

     "The overall assumption is that the withdrawal shouldn't really impact the

rating too much but then again we still need to do the work on it, and maybe the

odd sovereign could be more negatively affected than others and markets could be

more sensitive to that," she said. 

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

--MNI London Bureau; +44 203-586-2226; email: jamie.satchithanantham@marketnews.com

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