May 28, 2014 / 12:16 PM / in 4 years

RPT-Fitch: EU Vote Reinforces Peripheral Governments' Reform Mandate

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May 28 (Reuters) - (The following statement was released by the rating agency)

The European Parliament election results have strengthened the mandates of the ruling parties in Italy and Spain, and even the results in Greece and Portugal show considerable support for economic reform. The sustainable economic and fiscal policies being pursued in these countries are key factors underpinning ratings in the region.

In Italy, Matteo Renzi’s centre-left PD polled exceptionally strongly (41% vote share), following a campaign fought primarily on the issues of reform and the suitability of eurozone membership for Italy’s economy. The PD’s clear electoral victory over M5S and Forza Italia gives Renzi a re-enforced mandate. We view this as credit positive as it should provide further momentum to Renzi’s previously stated economic reform agenda.

Spanish Prime Minister Mariano Rajoy’s centre-right PP also topped the polls, securing 26% of the vote, against the opposition Socialists’ 23%. This result is striking because the PP has been at the helm since late 2011, overseeing drastic fiscal tightening and politically challenging reform. The relatively strong economic improvement in recent quarters is also likely to have contributed.

In both Greece and Portugal the ruling party lost by aabout four percentage points to the main opposition. Considering the scale of the austerity measures imposed under the bailout programmes, this shows there has not been a large electoral backlash against fiscal and economic reform.

In Greece, the ruling centre-right ND polled 23% against left-wing opposition SYRIZA’s 27%, although the (purely illustrative) combined vote share of the ruling ND/PASOK coalition exceeded this figure. The better-than-expected 8% vote for the PASOK-led centre-left grouping should provide some stability to the Greek coalition in the near term. In Portugal, the PSD/CDS-PP coalition that has been in power for the past three years of the bailout programme received 28% of the vote, behind the centre-left opposition Socialist Party’s 31% but not out of contention.

The easing of the eurozone crisis and the recovery of some individual sovereigns has been reflected in a number of positive rating actions for sovereigns in the periphery this year, most recently in Greece, which we upgraded to ‘B’ from ‘B-’ last week.

Although risks to political stability remain in all four countries, the elections support our view that these governments will continue to pursue sustainable economic and fiscal policies. However, even with strong fiscal policy discipline most eurozone countries will find it hard to significantly reduce public debt over the coming decade without a return to healthy levels of economic growth.

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