Fragile eurozone recovery projected

Credit ratings agency Moody's says borrowing during the COVID-19 pandemic has put Italy and Spain in a vulnerable position, as it gave a gloomy economic forecast for the eurozone in 2021.

Italy and Spain were two of the European countries that were first hit by the pandemic at the start of last year. Countries in southern Europe in general have suffered the most economic hardship over the last year, on top of their existing problems.

Moody's said financial support given at a European level and reduced economic output during the pandemic means that debt as a percentage of GDP will shoot up in some countries. Greece is projected to record the second-highest level in the world at 200 percent, with 158 percent in Italy and 120 percent in Spain.

"Credit risks are highest in Italy, Cyprus, Spain and Portugal given their high economic exposure to the crisis, together with their more limited fiscal space," analysts wrote in Moody's 2021 outlook for the region, adding the recovery was likely to be "slow, uneven and fragile".

Interest costs will be kept at manageable levels thanks to support from the European Central Bank, or ECB, but the economies identified remain vulnerable to changes in investor confidence.

The Financial Times reported that ECB President Christine Lagarde has warned governments and central banks not to get too excited by any tentative signs of recovery following the long-term damage of the pandemic.

Pent-up demand

She said the prospect of vaccines helping bring the pandemic under a greater degree of control may result in "expected pent-up demand" causing signs of revival this year, but they were unlikely to be sufficiently deep-rooted to justify a chance of monetary policy.

"Any kind of tightening at the moment would be very unwarranted," she told a Reuters online event. "We cannot rely on the expected pent-up demand, which might lead to some additional movement on the inflation front for instance … to tighten as far as monetary policy is concerned," adding this could cause "very serious risks".

The ECB had accounted for extended lockdown periods when calculating its eurozone growth forecast of 3.9 percent for the coming year, a figure which she said was still "very clearly plausible".

She added though that the extension of lockdowns beyond March, or a "laborious" start to the rollout of the vaccination program, could make circumstances more challenging.

The eurozone inflation rate was pushed into negative territory toward the end of last year because of a slump in demand for services such as holidays and restaurants, putting downward pressure on prices. People staying home in lockdown naturally spend less.

The rising value of the euro, which in December reached its highest level against the dollar in almost three years, has also resulted in imports becoming cheaper and exports more costly.