Weaker euro to have limited credit impact on UK, says Moody's
The impact of a weaker euro on the UK and other European countries outside the single currency bloc will be limited, according to Moody's.
In a report published after the close of markets on Monday, the ratings agency said the impact on economic activity in the UK will be more moderate, partly due to sterling's "limited appreciation against a range of currencies."
For research purposes, Moody’s studied 10 European countries outside the currency bloc and concluded that economic consequences of the euro's significant depreciation against the US dollar and other currencies over the past year appear to be most marked in Switzerland.
Swiss GDP growth is expected to be one percentage point lower in 2015 than Moody's estimated before the country removed the Swiss franc's peg against the euro.
The lower interest rates associated with the stronger Swiss franc are credit negative for the country's banks because they dampen profitability, albeit from high levels, Moody’s said. The stronger franc is also negative for Swiss non-financial companies that typically rely on exports.
Marie Diron, senior vice president at Moody’s, and the report's co-author, said, “The currency movements are credit negative for companies that compete with euro area producers and, in the case of Switzerland, for banks.
"However, for both UK and Swiss issuers, these credit effects are mitigated by other strengths such as their strong profitability or reliance on euro area-based production."
In Central and Eastern Europe (CEE), the weaker euro's trade implications are positive because they will likely foster higher economic growth in the euro area and greater demand for CEE exports.
Additionally, CEE countries' exposure to non-euro foreign currency debt is limited is limited, Moody’s noted. However, Croatian and Polish households face an increase in the cost of debt because they have significant amounts of Swiss franc mortgages.
While some measures are in place to mitigate the increased cost of servicing these mortgages, households will also share the burden, leading to reduced consumption or higher borrowing.