<\/p>\n
Higher defence demands will pressure government balance sheets, dent confidence, Moody\u2019s warns.<\/p>\n
The U.S. move away from its traditional allies in Europe raises geopolitical risks to sovereign credit ratings, and may weigh on economic growth, Moody\u2019s Ratings said in a new report released last week.<\/p>\n
The rating agency said that recent U.S. actions, including its vote last week against a U.N. resolution condemning Russia\u2019s invasion of Ukraine, signalled an apparent shift away from Europe and NATO, which increases risk in the region.<\/p>\n
\u201cU.S. disengagement from Europe and NATO is likely to create conditions for more intense Russian aggression, for example in the form of increased attacks on key telecommunications, energy or financial infrastructure through cyberattacks or sabotage of physical infrastructure,\u201d Moody\u2019s said.<\/p>\n
This increased risk has negative implications for sovereign credit ratings in the region, as the prospect of higher defence spending weighs on government balance sheets.<\/p>\n
Additionally, \u201csecurity concerns that weaken consumer and business confidence are likely to weigh on economic growth that, in many cases, is already weak,\u201d it said.<\/p>\n
While the negative macroeconomic effects aren\u2019t currently expected to be material, Moody\u2019s said that geopolitical risks could increase further if, for example, the U.S. pulls a large number of its troops out of Europe \u2014 intensifying the pressure on governments in the region to rapidly ramp up defence spending.<\/p>\n
\u201cThe negative effect of battered confidence on economic growth would likely be amplified, reducing private consumption and investment spending,\u201d it said.<\/p>\n
The combination of weaker growth and larger fiscal deficits would also then make it tougher for governments to stabilize their debt burdens, Moody\u2019s noted.<\/p>\n
Alongside its shifting approach to global security, other U.S. policy changes, particularly in areas such as trade, immigration and regulation, may pose significant headwinds to the global economy, it suggested.<\/p>\n
Indeed, in a separate report, the rating agency said that the potential U.S. policy shifts, \u201ccould create a more difficult global economic environment.\u201d<\/p>\n
Heightened policy uncertainty, \u201cwill dampen business investment,\u201d it said, and adds significant risk to economic forecasts.<\/p>\n
\u201cFinancial markets remain buoyant and are potentially underpricing the possibility of escalating trade frictions and weaker economic outcomes,\u201d it said.<\/p>\n
Collectively, the G20 economies are forecast to grow by 2.5% in 2025 and 2026, Moody\u2019s said \u2014 down from the 3.2% growth they averaged before the pandemic.<\/p>\n
Against this backdrop, monetary policy will diverge further among the G20, it noted.<\/p>\n
While the U.S. Federal Reserve Board is expected to keep rates unchanged for now, Moody\u2019s expects rate cuts to resume in September and December. At the same time, the European Central Bank (ECB) is expected to cut rates three to four more times this year, and the Bank of Japan is seen hiking rates, it said.<\/p>\n
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