Public debt, economic outlook and politics are the three key drivers of sovereign ratings in Western Europe, according to a new report from Fitch Ratings that presents a country-by-country look at sovereign credit trends in the region.
Positive rating actions have outnumbered negative ones since April of this year. There have been three upgrades (Greece, Iceland and Malta) and two downgrades (Italy and San Marino). Fifteen of the 22 rated sovereigns in Western Europe have stable outlooks while six (Andorra, Cyprus, Greece, Iceland, Portugal and Spain) have positive outlooks. The only country with a negative outlook is the United Kingdom, a reflection of the political and economic uncertainty from the break with the EU, though Fitch points out that its rating is not based on a specific outcome of the negotiations.
The key driver among Western Europe sovereign ratings is public finances. The most frequently cited rating sensitivity across the European Union sovereigns that Fitch rates is the trend in the ratio between public debt and GDP. Improvement in macroeconomic performance in the eurozone is expected to support public finances. “We assess fiscal developments through the cycle,” Fitch analysts said, “meaning that structural improvements in fiscal metrics are more likely to lead to positive rating actions.” A change to positive outlooks for Spain and Portugal are due to headline fiscal deficit reduction and improvement in structural balances that should lead to reduced government debt and improvement in external metrics.
Political challenges remain in the region. Populist and eurosceptic parties are not a spent force, Fitch said, and next year’s Italian elections could see euroscepticism regaining prominence. A continuance of tension between the Catalan and Spanish governments could lead to downside risk to Spain’s strong growth performance.
– Adam Fusco, associate editor