May 16, 2016 / 9:11 AM / 4 years ago

Fitch: 'Brexit' Would Increase Downside Risks to EU Sovereigns

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: 'Brexit' Would Raise Downside Risks to EU Sovereigns here LONDON, May 16 (Fitch) An exit from the EU by the UK ('Brexit') would weigh on the economies of other EU countries and increase political risks in Europe, Fitch Ratings says. We would not expect to take any immediate negative rating actions on other EU sovereigns if the UK left. But negative actions would become more likely in the medium term if the economic impact were severe or significant political risks materialised. As we have previously stated, we would review the UK sovereign rating in the event of a 'leave' vote (which is not our base case) in the 23 June referendum. The economic impact of Brexit would be lower for the EU than for the UK, but would still be palpable. 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. 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. EU countries could gain from the shift of some FDI from the UK to the EU. However, countries such as Luxembourg, Malta, Belgium and Germany, with a large stock of FDI and financial assets in the UK, would suffer losses in the euro value of those assets if there were a permanent depreciation of sterling. The banking sectors of Ireland, Malta, Luxembourg, Spain, France and Germany have sizeable links to that of the UK. Brexit would reduce the UK's contribution to the EU budget (a net EUR7.1bn in 2014 after rebates), potentially to zero. This would imply that other net contributors would have to increase payments, or net recipients accept lower EU expenditure. Brexit would create a precedent for countries leaving the EU. It could boost anti-EU or other populist political parties, and make EU leaders more reluctant to implement unpopular policies with long-term economic benefits. Negotiating the terms of the UK's exit could exhaust the EU's time and energy and open up new fronts of disagreement. 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. Brexit could precipitate Scotland leaving the UK, which might intensify secessionist pressures in other parts of the EU, such as Catalonia in Spain. 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. Fitch is not recommending any particular position, vote or outcome regarding the referendum vote on 23 June 2016. This research is simply providing the financial marketplace with increased transparency as to the possible impact on our ratings of various hypothetical outcomes from the referendum. Our report, "'Brexit' Would Raise Downside Risks to EU Sovereigns", is available on www.fitchratings.com or by clicking the link. We have also released "Leave or Remain: Hypothetical Brexit Scenarios", which discusses the rating consequences for a range of UK asset classes of four scenarios, ranging from the UK remaining in the EU to an unfavourable exit deal followed by Scottish independence. Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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