European banks better positioned to manage ‘Grexit’: Moody’s

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Moody’s says that European banks are better positioned to manage a Greek exit, though periphery banks remain vulnerable to risks

During the course of 2015, the risk of Greece (Caa2, negative) leaving the European Economic and Monetary Union — so-called ‘Grexit’ — has escalated. Although a Greek exit is still not Moody’s baseline scenario, the rating agency considers that overall euro area banks are better prepared to weather such a scenario than at the height of the euro area crisis. However, banks in other periphery countries remain vulnerable in the event of an exit.

“Broad improvement in euro area banks’ financial conditions and an associated stabilization in the region’s economic environment has made banks more resilient to external shocks than was the case during the height of the euro area crisis,” notes Sean Marion, a Managing Director in Moody’s London-based banking team.

Additionally, risk of restricted market liquidity, or ‘contagion’, is also lower than three years ago as investor confidence has been bolstered by a gradual return to economic growth across the region and the increased number of tools euro area policymakers can deploy as an important backstop in the event banks’ access to market funding were disrupted.

However, the report goes on to note that banks in other periphery countries — Cyprus, Ireland, Italy, Portugal and Spain — are still vulnerable in the event of an exit scenario. “Banks in the periphery markets have strengthened their financial positions in recent years,” add Mr. Marion. “But, legacy issues from the previous crisis still weigh on their ability to return to full financial health, while they are also more susceptible to restricted market access and higher cost of wholesale funding in the event of an adverse shock, given their more limited balance sheet flexibility.”

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