February 12, 2016 / 7:12 PM / 2 years ago

Moody's sees Brexit hitting whole EU; watching Poland closely

LONDON (Reuters) - A UK exit from the European Union would affect the whole region’s sovereign ratings, a senior Moody’s analyst said on Friday, warning it would set a precedent that other countries could end up following.

The European Union flag is pictured in a window reflecting a street in London, October 26, 2011. REUTERS/Luke MacGregor

Dietmar Hornung, the firm’s head of sovereign risk for Europe, also told Reuters it was monitoring Poland closely but was comfortable with its Portugal rating despite a bond market selloff.

Britain is expected to hold a referendum on whether to quit the 28-country EU in June or shortly after. All the main credit agencies have warned a vote to leave could hurt the UK’s rating, but Hornung said it could have a wider impact.

“If the UK did leave, it could be a credit negative for the EU,” Hornung said. “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.”

There is growing dissatisfaction in parts of the EU at the way the bloc is run. Critics also see the long-running battle to make governments bring their budgets closer into line with the bloc’s rules as sapping power from national parliaments.

Hornung said that while a Brexit may not be enough to trigger instant downgrades or outlook changes, “from a credit perspective, what would be positive would be more policy co-ordination and harmonization” in Europe, he added.

“But what we currently see in the public debate are forces that pull in the opposite direction which adds a tension and credit-negative layer over Europe as a whole.”

One of the countries that has taken a particularly anti-establishment turn is A2 ‘stable’ rated Poland.

Its new government has become increasing critical of the EU’s handling of issues such as the migrant crisis, and has begun to increase spending alongside policies that have raised concerns about the independence of its institutions.

Last month Standard & Poor’s cut its Polish rating to BBB+, two notches lower than Moody’s grade, despite having had a ‘positive’ outlook on the rating. It blamed the political uncertainty.

“Poland is at an interesting juncture,” Hornung said.

He said the question was now whether Warsaw stays with core Europe or take a less orthodox turn like Hungary, whose Prime Minister Viktor Orban has come under fire from the European Union and the United States for curbing media freedoms, its reforms of the court system, a centralisation of power and a crackdown on civil society groups.

“We are vigilant on the developments in Poland,” Hornung added. “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 13, although like other agencies it can make a change at any time if it thinks the circumstances warrant it.

Reporting by Marc Jones; Editing by Ruth Pitchford

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