S&P warns of risks in ‘crowded’ European elections year

Unexpected political outcomes may weigh on ratings but support for euro zone ‘firm’

Standard & Poor’s, the most optimistic among the world’s top-three agencies on Ireland’s creditworthiness, has warned that a “crowded” election schedule across Europe could lead to unexpected political outcomes and that could weigh on sovereign ratings.

Still, the firm said it expects commitment across all euro zone member states to remain within the single currency is "firm", as the cost of openly contemplating an exit is higher in a monetary union than the decision by the UK, a non-euro country, last year to leave the European Union.


"We expect that any impending member state withdrawal from the European and Monetary Union (EMU) would focus minds on the negative implications for the financial and economic stability for that member state," said Frank Gill, director of European sovereign ratings at S&P, in a report on Tuesday, noting how Greece suffered a run on bank deposits in 2015 as speculation over "Grexit" peaked.

However, he said further fiscal and political integration in the euro zone is “decidedly off the table” for the moment at least.


S&P has an A+ rating on Ireland, four levels below its top-notch AAA stance, saying there is scope for further upgrades if the Government’s financial performance beats expectations. S&P sees Ireland’s debt falling to 61 per cent of the economy’s size by the end of next year, from 71 per cent in 2015. However, the risk of external shocks and increasing spending pressures may have the opposite effect on its Irish rating, it said.

Looking at the electoral calendar across Europe, S&P’s main expectation is that a number of smaller parties will “cobble together a multiparty coalition” to prevent the right-wing Freedom Party, which is leading in opinion polls with up to 25 per cent of the vote, from governing after elections in mid-March.


Similarly, S&P is not factoring in a victory by Marine Le Pen of the National Front in French presidential elections in the second quarter of the year as its "baseline assumption", although it cannot be ruled out.

“A victory by Le Pen, who is on record as favouring both the break-up of the EU and a referendum to reintroduce the franc (though she has recently partially backtracked on this position) would likely be a blow to financial and economic stability, not only in France but across the monetary union,” said Mr Gill.

S&P sees a policy shift in Germany as a “low probability event” as the country faces a general election in the autumn.

“While Eurosceptic party Alternative for Germany has seen its approval rating rise, at 15 per cent, it lacks sufficient numbers to take on incumbent parties, in our opinion,” the analyst said.

Currency markets have been the focal point in recent times for international investors betting on big political events and risks. The euro surged to a two-month high of 0.876p against sterling on Tuesday amid heightened fears of a "hard Brexit" following comments by UK prime minister Theresa May over the weekend that Britain cannot keep "bits" of EU membership.

Joe Brennan

Joe Brennan

Joe Brennan is Markets Correspondent of The Irish Times