Brexit could drag CSE into downward ratings spiral

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Brexit would damage the Central and Southeast European region’s sovereign ratings. That appears to be the consensus among analysts.

Dietmar Hornung, Moody’s head of sovereign risk for Europe, said the ratings agency was monitoring Poland closely and that if Britain does decide in a referendum on its continued membership of the 28-country EU in June to leave, the consequences for Poland and the CEE could be disastrous.

Standard & Poor’s recently cut its Polish rating to BBB+, two notches lower than Moody’s grade. It retained a ‘positive’ outlook on the rating and blamed political uncertainty in Poland.

“It could be a destabilizing element that leads to further fragmentation. Any exit from the EU or the euro area could add momentum to the centrifugal forces, because it could set the precedent,” Hornung said.

One of the countries that has taken a particularly anti-establishment turn is A2 ‘stable’ rated Poland. “The larger-than-expected deficit and changes to the expenditures fiscal rule mean we observe quite a few certain credit negative developments.”

It is next due to review Poland on May 13th, although like other agencies it can make a change at any time if it thinks the circumstances warrant it.

Economist Anders Åslund of the Atlantic Council think tank in Washington, D.C., believes the immediate impact for CEE states would be small because Britain is tied to the EU budget until 2020. “The tightening of immigration for Central and Eastern European countries will be more severe, because Brexit will mean work immigration from Central and Eastern European countries will cease and that would be a serious source of popular dissatisfaction,” Åslund said.

Since joining the EU in enlargement waves over the last 12 years, the weaker economies of Central and Eastern Europe have enjoyed economic growth because of Brussels’ spending, fuelled in part by Britain’s relatively strong economy.

Poland, Lithuania, Romania and Bulgaria are among the strongest supporters of keeping Britain in the economic bloc as politicians and residents alike have expressed fear about the possible repercussions of a Brexit for their own economies.

After Germany, France and Italy, Britain is the fourth-highest contributor to the EU’s economy and that funding has helped new member states increase their gross national income (GNI).

“The absence of the U.K. in the EU, I think would put Central Europe in a position of asking what the EU is about, is there any practical means for the EU outside of a political union?” said Simeon Djankov, a visiting fellow at the Peterson Institute for International Economics think tank in Washington, D.C., who served as Bulgaria’s finance minister from 2009 to 2013.

That growth has been most evident in Poland, which became a member state in 2004 and has been the largest recipient of EU funds for several years, leading to widespread infrastructure development with high-speed trains and new highways.

Poland, Romania and Bulgaria all receive more money than they contribute to the EU’s budget, while the opposite is true for Germany and France — the top two contributors.

For Germany, total EU spending is 0.39 per cent of its GNI, for France it is 0.62 per cent, and for the U.K. it is 0.32 per cent. The figures jump in Central and Southeast Europe, with EU spending contributing 4.4 per cent to Poland’s GNI, 5.05 per cent to Bulgaria’s and 4.06 per cent to Romania’s.

“It is not in Poland’s interest that the U.K. leaves the European Union. We think it would lead to a big crisis and even a collapse if the U.K. left,” said Polish President Andrzej Duda in January this year.

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