Fitch Ratings-London-24 August 2018: Rating momentum for Western European sovereigns remained positive in recent months, with three rating upgrades (Cyprus, Greece and Andorra) since April 2018 and no downgrades, Fitch Ratings says. Three countries are on Positive Outlook (Austria, Cyprus and Finland). The United Kingdom and San Marino are on Negative Outlook. The UK’s Outlook reflects the continued downside risks of a disruptive exit from the EU.
Of the three countries that were upgraded, two – Cyprus and Greece – have each been upgraded by a total of five notches since mid-2015 as they have completed European Stability Mechanism (ESM) programmes (Greece exited its latest programme on 20 August).
More broadly, strong growth and improving public finances have underpinned improvements in Western European sovereign creditworthiness in recent quarters. General government deficits and debts are declining across most countries in the region. Near-term growth fundamentals remain solid, boosted by favourable financing conditions, robust employment growth and improving business profitability. Resilient domestic demand provides some offset to the drag from slowing global trade.
However, the prospect of slower GDP growth and higher interest rates means that further fiscal efforts may be required by highly indebted countries to place debt on a firm downward trajectory as politics becomes less conducive to tighter fiscal policies and structural reforms.
The shifting political backdrop is seen in strong election results by parties critical of “austerity” and, more generally, the whole EU framework, most notably leading to the formation of a coalition government in Italy led by the Five Star Movement and the Lega. The electoral campaign for next year’s European Parliament elections is likely to exacerbate divisions between pro- and anti-EU parties. Rising political uncertainty could further undermine recent positive growth dynamics if falling business confidence led to weaker capex growth.
Greece’s ESM programme exit marks an important milestone. On 10 August, we upgraded Greece’s foreign- and local-currency ratings to ‘BB-‘ from ‘B’. The upgrade reflects improved public debt sustainability, underpinned by debt relief measures agreed by European creditors, a track record of general government primary surpluses, our expectation of sustained GDP growth, additional fiscal measures legislated through to 2020, and somewhat reduced political risks.
The UK’s ‘AA’ rating remains on Negative Outlook. We think a smooth transition from EU membership has become less likely. An intensification of the political divisions within the UK and slow progress in negotiations with the EU mean there is such a wide range of potential Brexit outcomes that no individual scenario has a high probability. An acrimonious and disruptive “no deal” Brexit is a material and growing possibility. This would substantially disrupt customs, trade and economic activity, with the depth of disruption depending on how quickly a “bare bones” deal could be reached.
Source: Bloomberg
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