17/10/2017/Fitch Ratings
Public debt dynamics, the economic outlook, and politics remain the three key drivers of Western European sovereign ratings, according to Fitch Ratings’ latest Western Europe Sovereign Credit Overview, published today.
Public finances remain a key rating driver, with the trend in public debt-to GDP-ratios remaining the most frequently cited rating sensitivity across Fitch-rated EU sovereigns. Improved macroeconomic performance in the eurozone, which remain a key driver of our rating assessment, is set to support public finances. But we assess fiscal developments through the cycle, meaning that structural improvements in fiscal metrics are more likely to lead to positive rating actions.
For example, recent revisions of Portugal’s and Spain’s Outlooks to Positive reflect a combination of headline fiscal deficit reduction and some improvements in the structural balances that, in our view, will support a decline in government debt and marked improvement in external metrics against the backdrop of a more supportive macroeconomic environment.
Potential political shocks in the Netherlands and France did not materialise, but political challenges remain in the region. Populist and eurosceptic parties are not a spent force; support for them remains higher than in previous election rounds and they retain the potential to shape political agendas. The AFD and FPO’s showing in the recent German and Austrian elections are the latest example in Europe of eurosceptic parties increasing their support at the expense of mainstream parties. Italian elections (due in 2018) could see euroscepticism regaining prominence and a further sustained escalation of tensions between the Catalan and Spanish government could imply some downside risk to Spain’s recent impressive growth performance.
Since April this year, the number of positive rating actions in the region has outnumbered negative ones. There have been five rating changes, three upgrades (Greece, Iceland and Malta) and two downgrades (Italy and San Marino). Of the 22 rated sovereigns in west Europe, 15 have Stable Outlooks; six countries (Andorra, Cyprus, Greece, Iceland, Portugal and Spain) have Positive Outlooks, indicating that an upgrade is likely over a one- to two-year horizon.
Conversely, the UK remains the only country with a Negative Outlook, which reflects the political, economic and institutional uncertainty stemming from the UK-EU negotiations. Our rating is not predicted on a specific outcome of the negotiations. There is no single Brexit negotiating position commanding a majority popular or parliamentary support and this is creating delays in the process.