Moody's: EU enlargement beneficial

Increasing trade, financial and institutional integration with the European Union poses significant, and overall strongly positive, rating implications for the emerging Central and Eastern European economies, Moody's Investors Service says in a new report.

Eight of these nations have already achieved EU membership, with the remainder hoping to join in the not-too-distant future.

Although EU accession is likely to pose material medium-term challenges, in particular as regards fiscal policy developments, Moody's believes that both the new accession countries and the candidate nations will generally respond successfully.

"Most notably from a credit quality point of view, these countries' economic and social institutions will be strengthened through harmonization with those of the EU, which should bolster their ability to withstand potentially destabilizing capital flows," said Alexander Kockerbeck, a Moody's vice president and senior analyst and author of the report. As a result, Moody's will generally be able to rate these sovereign issuers at a level that could be up to several notches higher than that indicated by their stand-alone credit fundamentals.

In each case, the extent of the notching differentiation will depend on the country's EU membership status or its proximity to entering the European Union, and eventually European Monetary Union, which all new EU members are obliged to join.

Moody's cautions that the relatively high ratings for the accession countries do not necessarily preclude financial volatility, which could indeed even rise in the context of EU integration, given that short-term capital flows will increase.

"However, we believe that the deepening economic and financial institutional robustness that accompanies these countries' EU integration will reduce the risk that financial volatility would lead them to default on debt," Kockerbeck noted.

Moody's report, entitled "EU Enlargement: The Rating Implications," explains that individual countries' foreign currency transfer risk will be fully eliminated at the time of their entry into EMU. In this context, the level of and trend in total government debt, regardless of the currency in which it is issued, now constitutes the primary driver of creditworthiness, as in the advanced industrial countries.

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