Fitch Says Brexit to Pile Pressure on Europe Ratings

(Bloomberg) -- The U.K.'s credit-rating cut after voting to leave the European Union may be the first in a run of sovereign downgrades in the bloc if fiscal prudence takes a back seat to tackling political instability across the continent, Fitch Ratings said in a report.

When Fitch cut Britain's rating to AA from AA+ in June, it was one of 15 sovereign demotions in the first half. With 22 nations from Japan to Angola carrying a negative outlook, it's “likely" the total number of cuts this year will exceed the record 20 downgrades in 2011, according to an e-mailed report on Thursday.

Most of the reductions this year hit emerging-market countries still reeling from the impact of weakening commodity markets through 2014 and 2015 on their financial health. But the U.K. vote, by triggering economic and political instability across the EU, risks distracting governments from putting their finances in order. This may eventually contribute to deteriorating credit outlooks, Fitch said.

"Europe's political backdrop could have negative implications for sovereign ratings, as fiscal consolidation may drop further down the list of policy priorities," Fitch said.

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The more immediate threat of further downgrades applies to commodity-dependent developing countries. More than half the cuts in the first half of 2016 and 10 out of 22 countries assigned negative outlooks are in the Middle East and Africa.

Further ahead, with elections due in France and Germany next year, a referendum in Italy on constitutional reform scheduled for October and "ongoing government formation" in Spain following inconclusive polls, threats to political stability abound. A weaker U.K. economy will sap import demand from the bloc, while its exit negotiations with the EU are likely to be “complicated” and drawn-out.

"The U.K. aside, we do not anticipate negative rating actions in the near term as a result of the referendum," according to the report. Still, the build-up of political and economic headaches across the EU is "credit negative over the medium, long-term."

To contact the reporter on this story: Chris Vellacott in London at cvellacott@bloomberg.net. To contact the editors responsible for this story: Daliah Merzaban at dmerzaban@bloomberg.net, Cecile Gutscher