Cyprus among most exposed to a no-deal Brexit

Outlook for euro area sovereigns in 2019 is stable as economic growth will remain healthy in the region but Cyprus is one of the core countries most vulnerable to a disorderly Brexit, says Moody’s Investors Service.

Moody’s said rating actions in 2018 were positive as 15 euro area sovereigns have stable rating outlooks, while four have positive outlooks.

For the first time since 2007, no euro area sovereign has a negative outlook but there are downsides such as a no-deal Brexit. Moreover, high uncertainty over Brexit is a real worry for economic stability in several eurozone countries like Cyprus.

“The euro area sovereigns most exposed to a no-deal Brexit through trade and financial linkages are Ireland (A2 stable), Belgium (Aa3 stable), the Netherlands (Aaa stable), Cyprus (Ba2 stable) and Malta (A3 positive),” said Moody’s.

Nevertheless, the overall picture relatively upbeat.

“While economic growth in the euro area will slow in 2019, at 1.9% it will remain robust enough to be credit supportive,” said Steffen Dyck, a Vice President and Senior Credit Officer at Moody’s.

“However, mounting trade tensions and a slowing global economy are among prominent external downside risks to the benign macro-economic conditions we see for the euro area this year,” he added.

Uncertainty over a potential escalation in protectionism and heightened concerns about the direction of economic policy arising from political fragmentation could have a negative impact on both sentiment and investment, said Moody’s.

Despite the rapprochement between the US (Aaa stable) and the EU (Aaa stable) in July last year, further US tariffs on vehicles and parts remain a risk.

Germany (Aaa stable) and Slovakia (A2 positive) are seen as the most exposed given the openness of their economies. It argues that within the euro area, rising political fragmentation continues parliamentary balances.

“This gives rise to uncertainty regarding policy direction at the national level and limit the prospects for meaningful reforms intended to bolster the resilience of the euro area to shocks.”

Following significant improvements since 2011, Moody’s expects no material change to euro area aggregate fiscal and government debt metrics.

It believes around half of the euro area sovereigns will show fiscal deficits in 2019, and the euro area wide fiscal deficit will widen slightly to 0.9% of GDP.

“While the region’s government debt burden will continue its gradual decline, at 84% of GDP it is still much higher than the levels recorded prior to the global financial crisis.”

Elevated government indebtedness will remain a rating constraint for a number of euro area sovereigns such as Italy, Portugal and Spain.

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