EU candidates’ credit ratings will not suffer in case of war

Prague – The credit ratings of 10 Central and Eastern European EU candidate countries are likely to hold steady in the event of war in Iraq, an official with Standard & Poor’s said on Tuesday. «Sovereign ratings in the region should be fairly resilient to external shocks in 2003 and are sufficiently robust to withstand the impact of a war in Iraq,» Kevin Daly, an associate director with S&P’s sovereign ratings, told Reuters. Speaking on the sidelines of a syndicated lending conference, he said a war in Iraq – which the United States and its allies say must be disarmed, by force if necessary – would likely lead to at least a temporary spike in the price of oil. S&P has stable outlooks on all sovereign ratings in the region, except Slovakia, Slovenia, Bulgaria and Romania, which have a positive outlook. Slovenia tops the region’s rating table, with its foreign currency obligations rated «single-A,» followed by the Czech Republic, Estonia and Hungary with a «single-A-minus» status. Investors have piled billions of euros into the emerging markets of eight East European countries set to gain EU membership in May 2004, hoping for juicy returns when they become part of the eurozone later this decade. They have also dipped their toes into Bulgaria and Romania, two southeastern countries due to join the EU in 2007. Daly said fiscal prudence and a credible path toward a country’s eventual entry into Europe’s single-currency zone were key to maintaining economic and rating stability, and that swift progress in these areas could make room for ratings upgrades. Ratings convergence Massive investment inflows have helped the region’s leading economies outpace the EU’s insipid growth, but the Czechs and other small and open regional economies have felt the pinch of flagging EU export demand, which has dampened economic activity. But Daly said swift progress toward fiscal consolidation and often painful structural reforms would have a far bigger bearing on the candidates’ ratings prospects in the years ahead than external factors. «It’s important to see fiscal deficits start showing a declining trend. Ratings could go higher in the medium term if we see the trend toward a decline in fiscal deficits,» he said. The governments of the most advanced candidates – Poland, Hungary and the Czech Republic – have been running high fiscal deficits which must be trimmed to fit the limit of 3 percent of gross domestic product before they can join the eurozone. Once European monetary union membership is assured, foreign currency ratings will converge with local currency ratings, which on the prospective EMU members will likely fall within «double-A» and «single-A» categories. «It’s too early to say whether this convergence will be up or down. Much will depend on the fiscal outlook and structural reforms in a country and where the trends in the fiscal deficits and external debt indicators are headed,» he said. He said a delay of several years in adopting the euro by some applicants compared with their regional peers would be unlikely to affect ratings much. The candidates target 2007 as the date for ditching national currencies in favor of the euro.