Important developments today:
1. Moody's cuts its ratings on 26 Italian banks
2. Eurozone escapes a technical recession
Moody's cuts its ratings on 26 Italian banks. Rating agency Moody’s Investor Service downgraded the credit ratings of 26 Italian lenders on Monday, including the country’s biggest bank Unicredit. Moody’s cited the country’s double-dip recession and the increasingly challenging operating environment that Italian banks are currently facing. The ratings agency also warned that further downgrades are possible for other banks. The downgrade followed Moody’s decision on February 13th to lower its sovereign rating on Italy and five other countries. Italian banks are now ranked lower than most of their Western European counterparts and are struggling with shrinking loan demands and soaring non-performing loans, and are likely to face more loan defaults, limited access to funding, and weaker earnings following Moody’s downgrade.
Eurozone escapes a technical recession. Following the 0.3% GDP contraction in Q4 2011, strong growth from Germany kept the Eurozone out of a technical recession (two quarters of negative growth). First estimates of GDP released by Eurostat today shows GDP remained stable in the 17-member bloc for Q1 2012 [see Chart at http://prospects or http://www.worldbank.org/prospects]. Supported by strong net exports and domestic consumption growth, Germany, the Eurozone’s largest economy, grew at 0.5% (q/q) helping to offset the recession in austerity-hit Italy, Spain, Portugal and Greece. Other recession hit economies in the zone included the Czech Republic and the Netherlands. GDP in France, the second largest Eurozone economy, remained unchanged in Q1 2012. Looking forward, recent business surveys suggest activity is at the most depressed levels since mid 2009, suggesting persisting weakness through Q2 2012. The European Commission forecasts that the Eurozone economy will contract by 0.3% in 2012, and expand by 1.0% in 2013.
Among Emerging Markets
In Europe and Central Asia, Russia’s economy expanded 4.9% year-on-year (y/y) in the first quarter of 2012, a slight improvement over the 4.8% registered in the fourth quarter of 2011, according to the Federal Statistics Service. Notwithstanding almost stagnant output in the European Union (Russia’s largest trade partner), GDP growth was boosted by strong private consumption growth and high crude oil prices. Consumer price inflation in Bulgaria remained at 1.7% (y/y) in March, the same rate as in February, as almost stable food prices (partly due to a high base) offset the effect of an increase in non-food items.
In South Asia, Sri Lanka’s central bank left its benchmark repurchase rate unchanged at 7.75% as the outlook for inflation remained favorable (despite an acceleration of consumer price inflation to 6.1% (y/y) in April from 5.4% in March) due to expected improvement in domestic food supplies, the recent fall in international crude oil prices, and policy measures taken by the central bank that are expected to moderate the expansion of credit.