Greece may not be at risk of persistent inflation, at least not to the extent that other EU countries face, but is more vulnerable to the risk of stagflation – inflation combined with low growth – and this could affect its credit, rating agency Moody’s says.
Moody’s believes stagflation, a phenomenon widely seen in the 1970s and early 80s, is the most likely scenario for EU countries, with Greece and Romania having the least flexibility to deal with such a possibility.
Moody’s notes the Russian invasion of Ukraine has undermined both demand and supply and has boosted inflation to levels unseen in most European countries since the mid-80s, although Greece suffered from double-digit inflation until 1995.
In June 2022, EU inflation was at an annual level of 9.6%, its highest level since 1983; more than half of the 27 members, Greece among them, have double-digit inflation.
Global supply problems have slightly receded, but businesses continue to report great scarcity in equipment and raw materials. Although not Moody’s baseline scenario, a halt of Russian gas supplies would likely intensify these pressures, weaken economic activity and increase the risk of stagflation.
Southern EU countries appear more vulnerable to persistent inflation. As Moody’s notes, “the countries combining the highest likelihood to see transitory price increases become permanent and the lowest policy capabilities are Malta, Cyprus, Portugal, Slovenia and Croatia.” But, it adds, “while Greece and Romania appear to be least exposed to a scenario of engrained inflation, their policy capabilities to combat a stagflationary cycle are among the weakest in the EU.”
Things are not rosy for bigger countries, either, Moody’s says: “Although Italy, France and Spain are less vulnerable to inflation taking hold, already high debt levels, elevated floating-rate exposure and sizable principal and interest payments over the next 12 months heighten risks.”
Moody’s assesses the various countries’ ability to fight against persistent stagflation on the basis of a number of factors, including cost of debt servicing, which is among Greece’s weakest points.