* Adjustments in Euro area periphery continue, but pre-crisis GDP unlikely in medium term, says Moody's *
The countries of the euro area periphery (Cyprus, Greece, Ireland, Italy, Portugal and Spain) have made significant progress towards addressing the internal and external imbalances and the associated losses in competitiveness that were among the drivers of their unsustainably high public debt burdens, Moody's Investors Service said.
However, these improvements are not in and of themselves a sufficient condition for sustainable growth, and the rating outlooks on periphery countries remain negative to reflect their remaining adjustment needs, the ongoing institutional developments at the euro area level and their overall sluggish macroeconomic prospects. Overall, Moody's does not expect the periphery to record pre-crisis GDP levels before 2016-17.
The rating agency noted that the reversal of the current account imbalances in the periphery continued last year. As of the end of 2012, all periphery countries had restored their current account balances to mid-1990 levels (-1.0% on average).
Moody’s expects Ireland, Portugal and Spain to be in surplus by the end of this year.
The periphery's positive trade balance since 2011 is the main driver of these changes in the current account. These trade balance gains were initially driven by a contraction in imports, but have since been increasingly driven by stronger exports due to competitiveness improvements and increasing geographical diversification. However, it is unclear whether these competitiveness gains are sufficiently sustainable to enable the adjustment to be completed.
Moody's also noted that structural reform programmes have also progressed (with full implementation in some cases) for most periphery countries, which should provide some long-term support to the competitiveness gains.
However, Moody's said that the return to pre-crisis GDP levels is taking longer for these countries than for other economies that have experienced financial shocks in the past. One of the reasons for this longer adjustment timeline may be that the common euro area currency prevents these countries from using a nominal depreciation of their currencies and requiring "internal devaluations" in order to improve international competitiveness.
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