OREANDA-NEWS. Fitch Ratings has issued a new report providing a country-by-country overview of sovereign credit trends in Western Europe. Key themes identified in the report include the negative impact of 'Brexit', political uncertainty and public finance developments.

The UK vote to leave the European Union in the referendum on 23 June will have a negative impact on the country's economy, public finances and political continuity, leading Fitch to downgrade the rating to 'AA'/Negative. The extent of the medium-term economic shock will mainly depend on the nature of any future trade agreement with the EU, by far the UK's largest export market.

Brexit will also have adverse effects on other EU economies and increase political risks in Europe, which are already heightened by rising support for populist parties and the migration crisis. We would not expect Brexit to trigger any immediate negative actions on other EU sovereigns. However, that would become more likely in the medium term if the economic dislocation of a Brexit were to prove severe or political tail risks were to materialise.

Spain's election appears to reduce the risk of a repeat of the political gridlock that followed December's election, although the political landscape remains fragmented and the final outcome uncertain. A protracted period of political uncertainty about government formation or heightened tensions with regional governments would put pressure on Spain's ratings. Successful ESM programme implementation would put upward pressure on Greece's ratings over the medium term.

Many eurozone governments have moved away from strict interpretation of the European fiscal rules, favouring looser budgetary policy. This is likely to be growth-supportive in the near term but further undermines fiscal credibility. Public debt remains a key rating driver for European sovereigns. In Italy and Portugal, failure to make progress in reducing the government debt/GDP ratio in the short term may lead to negative rating action. In France, weakening confidence that the debt ratio will be placed on a downward path may put downward pressure on the ratings. In Belgium, further fiscal slippage or persistently weak growth may lead to a downgrade.

Evidence of improved medium-term growth prospects, accompanied by structural reforms and improved competitiveness, would be ratings positive in several countries including Austria, Belgium, Finland and France. In Cyprus, an acceleration in bank loan restructuring, continued economic growth and sovereign market access could lead to an upgrade.