Moody's: Which countries are geopolitically and financially at risk from the war in Ukraine?

Source: Money Review

Geopolitical tensions in Eastern Europe may have been high for years, but the Russian invasion of Ukraine is a paradigm shift in the post-Cold War European order of security, according to Moody's analysts. The rating agency seeks to identify the countries that are most vulnerable to the decrystallization of geopolitical risk but also those that face fiscal risks from the consequent shift to increased defense spending.

According to the house's analysis, the countries facing the greatest geopolitical risks are Estonia, Latvia, Lithuania, Poland and Finland. These dangers arise (1) from their common border with Russia, (2) from their geographical and strategic position vis-a-vis Kaliningrad or St. Petersburg, (3) because they are former members of the Soviet Union or the Russian Empire, ( 4) from the presence of Russian minorities and/or (5) from their participation or not in NATO.

"While not a groundbreaking contribution to the genre, recent developments have clearly increased the risk of an armed conflict with Russia escalating into the European Union," said Moody's analysts. 

The budgetary implications

In the face of this risk, the shift of European governments to higher defense spending is already visible. Germany intends to spend € 100 billion in the coming years, reversing a long period of under-investment in the sector and helping it meet NATO's defense target of more than 2% of GDP.

According to Moody's analysts, the additional spending will increase government borrowing and raise debt / GDP by about 2.5 percentage points. However, other spending related to this crisis and lower growth are recognized as the factors that contribute most to the projected debt growth of close to 70% of GDP in the coming years.

What other countries will follow? After Germany, Moody's expects pressure to intensify on other countries that fall short of NATO's defense spending target of 2% of GDP, which is expected to hamper fiscal adjustment and debt reduction.

According to the rating agency, the countries that face the greatest risks are those that already have high levels of debt and are more than 2% of GDP in defense spending. As a result, the biggest fiscal risks are in Italy, Spain, Belgium and Portugal, if they decide to follow Germany's example and increase defense spending.

Greece is missing from the list, as it is the country with the highest defense spending as a percentage of GDP, despite its high debt levels.