Cyprus is one of the European Union countries most exposed to Brexit, mainly because of its exposure to incoming tourism from the UK, the share of its portfolio investment in the UK, and its excessive government debt, Moody’s Investors Service said.
The “direct impact of Brexit is not significant for most EU member states, with a few exceptions”, Moody’s said in an emailed statement on Tuesday, citing the findings of a report on the impact of the June 23 decision of British voters to leave the EU on other member states. “Although there is a strong positive correlation between UK and EU business cycles, Brexit is unlikely to have a significant direct impact on most EU member states given their manageable dependence on the UK as an export destination, tourism market and source of investment”.
Ireland, rated A3 with positive outlook by Moody’s, “has by far the largest exposures to the UK’s exit from the EU, although Belgium via the trade channel and Spain and Cyprus via the tourism channel are also more exposed than others,” the ratings company said. Belgium’s sovereign rating is set at Aa3, while that of Spain and Cyprus are Baa2 and B1 respectively. The ratings of all three countries carry a stable outlook.
In addition, as a result of the integration of the financial system of Cyprus, Ireland, Luxembourg and the Netherlands in the British financial system, as well as their respective corporate links to the UK, Brexit may also upset their profit and dividends from UK operations as a result of the depreciation of the sterling, which lost roughly one tenth of its value against the euro following the referendum, Moody’s said.
“We expect any gains from relocation to be small and gradual, and largely dependent on the business environments of individual European countries,” Moody’s said.
In addition, certain countries with high government debt and exposed to Brexit via tourism, including Cyprus which has a debt to gross domestic product ratio of 108.9 per cent in 2015 and restored its market access in October last year after being shut out since May 2011, Portugal and Spain have “less policy space,” Moody’s said. The UK is traditionally Cyprus’s largest source of incoming tourism.
In contrast, “northern EU states with strong fiscal metrics, such as Germany, the Netherlands, and Sweden, are the best positioned to withstand the shock – but could also be expected to pay somewhat higher contributions to the EU budget in coming years in the event that the UK’s departure leads to a loss of revenue,” the Moody’s report said.
In addition, Moody’s said that the UK’s exit from the EU could corrode the latter’s cohesion in the long-term.
“Brexit could embolden anti-EU movements in the short term, particularly in countries that have elections or other important votes scheduled in the next 18 to 24 months,” the rating company said.
“This has the potential to influence the tone and content of political debate, as well as the range of policy options, not least on immigration policy. However, further fragmentation of the EU is currently unlikely”.