OREANDA-NEWS. Fitch Ratings says in a new report that euro adoption in non-euro central and eastern Europe (CEE) countries would be neutral to positive on sovereign creditworthiness, with foreign currency ratings likely to be upgraded by up to one notch, or two in exceptional cases.

The biggest beneficiaries would be Croatia (BB/Negative) and Bulgaria (BBB-/Stable) while the Czech Republic (A+/Stable) and Poland (A-/Stable) would likely benefit least. Hungary (BB+/Positive) and Romania (BBB-/Stable) are more intermediate cases. However, euro membership remains a remote prospect as it has disappeared from the political agenda in all the six countries.

Drawing on lessons learnt from the euro crisis, and consistent with Fitch's longstanding approach, those gaining most from euro adoption would be countries with weak external finances, as they would benefit from the reserve currency status of the euro, high level of loans in euros to the private and government sectors (or high "euroisation") which would benefit from the neutralisation of exchange rate risk on the economy, and a fixed exchange rate. A fairly low level of government debt and a flexible economy would support adjustment to shocks and would be strong assets within the European Monetary Union (EMU).

Croatia and Bulgaria could gain most from joining the EMU. Their currencies are already tied to the euro, so they would not lose the benefits of independent monetary policy. The two economies are highly euroised, especially Croatia where euro loans to the private and government sectors are equivalent to 46% and 57% of GDP, respectively; euro adoption would also strengthen weak external finances. Key challenges within the EMU would include weak economic flexibility, as evidenced by high unemployment rates (16.9% in Croatia and 11.5% in Bulgaria) and high government debt in Croatia (86% of GDP in 2015).

Hungary and Romania would lose the benefits of independent monetary policy. Euroisation in the two countries is also more limited than in Bulgaria and Croatia, although in Hungary government debt in euros is high (23% of GDP). Given both countries' sizeable net external debt , the adoption of a reserve currency would strengthen external finances in both. Romania's low government debt would leave the country with some policy flexibility and Hungary's open economy would benefit from reduced transaction costs.

Poland and the Czech Republic would likely benefit least from euro adoption. The two countries would abandon a credible and independent monetary policy framework that has helped support macroeconomic adjustments. In Poland, the EMU would strengthen external finances, a key rating weakness, but the bulk of foreign currency loans to households are in Swiss francs. The Czech Republic's strong external balance sheet means it would benefit less than the others from the reserve currency status of the euro.

Euro adoption is not on the political agenda. None of the six countries have set an official date for entry in the Exchange Rate Mechanism (ERM) II, and euro adoption. Euroscepticism is especially strong among the governments in Poland and Hungary. The recent economic and financial crisis might be a key factor in explaining this low enthusiasm. Fitch does not expect political debate over euro adoption to start in the near term.

Based on Fitch's calculation, Bulgaria, the Czech Republic, Poland and Romania meet all the convergence criteria except participation in the Exchange Rate Mechanism II; Hungary meets three criteria; Croatia only meets two criteria. All countries recorded general government deficits below the required 3% of GDP in 2015, except Croatia. General government debt is below the 60% of GDP reference value in all countries, except Croatia and Hungary. Inflation has remained subdued in all countries and long-term interest rates are lower than the reference rate in every country.