S&P gives stark warning on EU ratings

Standard & Poor's has cautioned that government complacency, particularly over pensions, could leave Europe without a single AAA-rated state by as early as 2043.

The credit ratings agency painted a dismal picture of how sovereign ratings might look if governments ignored the torrent of problems that would accompany their ageing populations, and it warned European policy makers to maintain focus on fiscal reforms.

The stark warnings came as part of an S&P report on the European Union enlargement due to take effect on 1 May with the accession of 10 new members from eastern Europe.

Konrad Reuss, S&P's head of European sovereign ratings, said: "Policy in the next 10 years will determine what will happen. The issue is no doubt serious, and merits serious attention.

"I do not expect European governments to introduce radical changes to their pension laws but they must start working on solutions, otherwise we could see a dip in the ratings. I don't think the worst case, that we talked about, will be realised, but we can probably expect a dip in the future without serious work on the issue."

He also warned the new members not to expect the EU to provide a "floor" for ratings. "There is no doubt that whilst many new members have seen ratings rise recently, they should not expect that the EU will be some sort of roadblock in us considering downgrading in the future," Mr Reuss said.

S&P expressed "particular concern" about Poland, Hungary and the Czech Republic. Mr Reuss noted that the three countries had the "biggest and most worrying fiscal imbalances of all incoming member states".

The Czech Republic, for example, could face a deficit of up to 13 per cent of GDP this year. Generally, the three countries have maintained deficits of about 6 per cent since 2000.

The 10 new members will increase the population of the EU by a third. However, their combined GDP is equivalent to only about 5 per cent of the current European output.

Comments