Europe’s refugee crisis could pose a major threat to sovereign bond ratings if mishandled at a political level, Standard & Poor’s has warned.
In a report, the rating agency said the inability of member states to find co-operative solutions pointed to ongoing governance problems at the heart of the EU, which it considered a “key factor” when rating sovereigns.
It claimed Europe’s approach to solving the refugee influx, if mishandled, might lead to increased populism and xenophobia, potentially diverting attention from budgetary and structural reforms.
Violent break-up
The agency noted the number of asylum seekers in Western Europe would soon surpass previous peaks set in the early 1990s arising from violent break-up of Yugoslavia, with the largest contingent of arrivals coming from
Syria
, where the security situation continues to worsen.
While the crisis is unlikely to weaken EU economies and budgets enough to lower sovereign ratings, it said there would be significant fiscal implications in the short term, with host countries having to administer shelter, subsistence and education. To this end, the German federal government has set aside €6 billion of extra spending on refugees next year, some 2 per cent of overall spending, or 0.2 per cent of gross domestic product (GDP).
Nonetheless, it suggests the overall direct cost appears to be fairly modest.
Alleviating challenges
Over the longer term, those EU countries that grant asylum to the new arrivals might even witness a “mild positive impact” on their growth, with the newcomers partially alleviating the looming economic and fiscal challenges that adverse demographic trends will bring.
The biggest uncertainty posed by the refugee crisis for sovereign ratings relates to the ability of European institutions and governments to find cooperative solutions, it said.
“In the recent past, speedy decision-making in the face of European crises has often proved elusive, which we believe can be detrimental to credit quality,” it said.
At the height of the sovereign debt crisis in December 2011, the agency placed all euro zone sovereign ratings on credit watch with negative implications, and downgraded nine of them the following month in the absence of strong policymaking, which it claimed deepened the financial crisis.
