Moody's: Croatia most exposed to euro depreciation; limited impact on the UK and Switzerland

The depreciation of the euro against other currencies is affecting the creditworthiness of some issuers in the rest of Europe, with Croatia-based issuers the most vulnerable to the currency trend and those based in the UK and Switzerland facing only limited pressure, says Moody's Investors Service in a report published today.

The report focuses on large economies, including sovereign, corporate and banking issuers, in Western Europe and Central and Eastern Europe (CEE).

Moody's report, entitled "Impact of weaker euro on the Rest of Europe - Croatia most exposed; limited credit impact on UK and Switzerland," is available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release. The rating agency's report is an update to the markets and does not constitute a rating action.

"While a weaker euro could put pressure on export price competitiveness in the UK and Switzerland, we expect the credit impact to be limited," says Marie Diron, Senior Vice President, Credit Policy at Moody's.

"Against a range of currencies, the appreciation of the pound has been modest, which implies a moderate impact on the UK's economic activity. For Switzerland, the de-pegging of the franc will likely have only a short-term impact on growth, while allowing the central bank to regain control of its balance sheet and monetary policy stance."

Moody's forecasts Swiss GDP growth of 0.8% in 2015 and UK GDP growth of 2.7% this year.

The currency movements are credit negative for corporates competing with euro area producers and, in the case of Switzerland, for banks, although they are mitigated by other strengths such as strong profitability or reliance on euro area-based production, in Moody's view.

"For Central and Eastern European countries, local currencies have weakened alongside the euro, which results in higher debt burdens for countries with large amounts of non-euro foreign currency debt," says Ms. Diron.

"At the sovereign level, amongst the larger CEE countries, Croatia is most exposed to an increase in the cost of non-euro foreign currency debt. For corporates, however, the increase in the cost this type of debt is very small."

Nearly all of the Bulgarian and Czech governments' debt is either in local currency or euros. By contrast, around 40% of the Croatian government's debt is in US dollars. The depreciation of the kuna is leading to higher debt-servicing costs, although refinancing risk is mitigated by the fact that a large proportion of this debt is owned by residents, a typically less volatile investor segment, in Moody's view.

Moreover, Croatian and Polish households face a high increase in the cost of debt because of significant amounts of Swiss franc mortgages. This will translate into an increased cost of servicing these mortgages, according to Moody's. As a result, household leverage will likely rise, which would increase the vulnerability of households to future negative shocks.

By contrast, the share of foreign-currency mortgages held by Hungarian households has greatly diminished after the completion of the mortgage conversion plan earlier this year, says Moody's.