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Moody's: Cyprus most exposed to high household debt risks

20/11/2018 12:38
Among highly indebted European sovereigns,  Cyprus (Ba2 stable) is most exposed to credit risks related to high  household debt because it has a small economy, weak banking sector, and very elevated public and private debt levels, Moody's Investors Service said in a report today.

European countries that are more economically resilient are able to carry higher and rising household debt without it necessarily weighing on their  sovereign credit profiles.

"Cyprus's sovereign credit profile is the most exposed of all the highly  indebted European sovereigns to risks linked to high household debt,"  said Sarah Carlson, a Moody's Senior Vice President and co-author of the  report. "Elsewhere in Europe, financial assets such as savings, insurance  and pensions, as well as generous social safety nets, protect sovereigns  against the risks stemming from high household debt."

For most European countries, the increase in private debt ratios peaked  around 2008 before starting a downward trend, especially in post-crisis  countries such as Ireland (A2 stable), Spain (Baa1 stable), Portugal  (Baa3 stable) and Iceland (A3 positive).

This deleveraging was accompanied by an increase in public debt burden, with the exception of Iceland, where government debt declined  substantially.

Cyprus is notable for not having seen a decline in household debt, where  levels grew by 21% of income between 2007 and 2017 from an already high  starting point.

The Mediterranean island also has a number of unique market  characteristics that heighten the risks posed by high debt. Consumer  loans account for almost half of outstanding household debt; close to  100% of Cypriot mortgages are floating rate and the country has an  already weak shock-absorption capacity. In addition, Cyprus's economy is  smaller and less diversified and its growth is much more volatile.

Highly competitive and wealthy economies and healthy banks limit risks from rapid house price inflation in Sweden (Aaa stable), Norway (Aaa  stable), Luxembourg (Aaa stable), the Netherlands (Aaa stable) and  Denmark (Aaa stable).