Ratings agency Fitch has warned a Brexit could have major ramifications for European sovereigns.
The ratings agency has suggested a number of countries could face downgrades if the UK decides to quit Europe at the referendum on 23 June.
‘We would not expect to take any immediate negative rating actions on other EU sovereigns if the UK left,’ Fitch said in a report titled Brexit Would Raise Downside Risks to EU Sovereigns.
‘[But] negative actions would become more likely in the medium term if the economic impact were severe or significant political risks materialised.’
Fitch has previously indicated it would review the UK’s AAA-rating in the event of a Brexit.
The economic impact of a UK exit would be lower for the EU than for the UK, according to Fitch.
‘It would reduce EU exports to the UK, although the extent would depend on the nature of any UK-EU trade deal and the degree and duration of sterling depreciation,’ Fitch said.
‘The most exposed countries would be Ireland, Malta, Belgium, the Netherlands, Cyprus and Luxembourg, all of whose exports of goods and services to the UK are at least 8% of GDP.’
Rise of populism
Fitch fears a Brexit would create a precedent for countries leaving the EU.
It said it could boost anti-EU or other populist political parties. This in turn could make EU leaders reluctant to implement unpopular policies with long term economic benefits.
Fitch said: ‘Negotiating the terms of the UK’s exit could exhaust the EU’s time and energy and open up new fronts of disagreement
It added: ‘[A Brexit] could shift the centre of gravity of the EU, making it more dominated by the eurozone core, poorer, more protectionist and less economically liberal.
‘If the UK were to thrive outside of the EU, it might encourage other countries to follow suit.’
Fitch also suggested a Brexit could encourage Scotland to leave the UK, intensifying secessionist pressures in other parts of the EU, such as Catalonia.
The ratings agency is concerned the fresh uncertainty could have a detrimental impact for Europe’s debt.
‘Fears of other countries leaving could widen bond spreads for “peripheral” countries, potentially increasing the average cost of debt and making it more challenging to reduce government debt/GDP ratios,’ it said.
Source: New Model Adviser