Moody's sees Brexit hit­ting whole EU

The Pak Banker - - COMPANIES/BOSS -

A UK exit from the Euro­pean Union would af­fect the whole re­gion's sov­er­eign rat­ings, a se­nior Moody's an­a­lyst said on Fri­day, warn­ing it would set a prece­dent that other coun­tries could end up fol­low­ing.

Di­et­mar Hor­nung, the firm's head of sov­er­eign risk for Europe, also told Reuters it was mon­i­tor­ing Poland closely but was com­fort­able with its Por­tu­gal rat­ing de­spite a bond mar­ket sell­off. Bri­tain is ex­pected to hold a ref­er­en­dum on whether to quit the 28-coun­try EU in June or shortly af­ter. All the main credit agen­cies have warned a vote to leave could hurt the UK's rat­ing, but Hor­nung said it could have a wider im­pact.

"If the UK did leave, it could be a credit neg­a­tive for the EU," Hor­nung said. "It could be a desta­bi­liz­ing el­e­ment that leads to fur­ther frag­men­ta­tion." "Any exit from the EU or the euro area could add mo­men­tum to the cen­trifu­gal forces, be­cause it could set the prece­dent."

There is grow­ing dis­sat­is­fac­tion in parts of the EU at the way the bloc is run. Crit­ics also see the long-run­ning bat­tle to make gov­ern­ments bring their bud­gets closer into line with the bloc's rules as sap­ping power from na­tional par­lia­ments.

Hor­nung said that while a Brexit may not be enough to trig­ger in­stant down­grades or out­look changes, "from a credit per­spec­tive, what would be pos­i­tive would be more pol­icy co-or­di­na­tion and har­mo­niza­tion" in Europe, he added.

"But what we cur­rently see in the pub­lic de­bate are forces that pull in the op­po­site di­rec­tion which adds a ten­sion and credit-neg­a­tive layer over Europe as a whole."

One of the coun­tries that has taken a par­tic­u­larly anti-es­tab­lish­ment turn is A2 'sta­ble' rated Poland. Its new govern­ment has be­come in­creas­ing crit­i­cal of the EU's han­dling of is­sues such as the mi­grant cri­sis, and has be­gun to in­crease spend­ing along­side poli­cies that have raised con­cerns about the in­de­pen­dence of its in­sti­tu­tions. Last month Stan­dard & Poor's cut its Pol­ish rat­ing to BBB+, two notches lower than Moody's grade, de­spite hav­ing had a ' pos­i­tive' out­look on the rat­ing. It blamed the political un­cer­tainty.

"Poland is at an in­ter­est­ing junc­ture," Hor­nung said. He said the ques­tion was now whether War­saw stays with core Europe or take a less ortho­dox turn like Hun­gary, whose Prime Min­is­ter Vik­tor Or­ban has come un­der fire from the Euro­pean Union and the United States for curb­ing me­dia free­doms, its re­forms of the court sys­tem, a cen­tral­i­sa­tion of power and a crack­down on civil so­ci­ety groups.

"We are vig­i­lant on the de­vel­op­ments in Poland," Hor­nung added. "The larger-thanex­pected deficit and changes to the ex­pen­di­tures fis­cal rule mean we ob­serve quite a few cer­tain credit neg­a­tive de­vel­op­ments."

It is next due to re­view Poland on May 13, al­though like other agen­cies it can make a change at any time if it thinks the cir­cum­stances war­rant it.

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