Russian gas crisis raises credit pressure on European governments

By Juliette Portala

(Reuters) – A squeeze in Russian gas supplies would threaten the credit ratings of Slovakia, the Czech Republic and Italy, Moody’s said in a report on Thursday, while most of Europe would feel the economic effects of a likely spike in natural gas prices.

Russian gas supplies to Europe at the beginning of August were about a third of their level before Russia’s invasion of Ukraine, a shortfall only partially offset by higher imports of liquefied natural gas (LNG), the global ratings agency wrote.

If Moscow were to halt all gas supplies, Slovakia and the Czech Republic could see their respective sovereign ratings of A2 and Aa3 jeopardised, Moody’s said in its report.

“Beyond the 2022-23 winter season, both face greater infrastructure challenges diversifying away from Russian gas supplies, as both countries are landlocked and thus cannot directly import LNG,” it said.

The agency cut Italy’s outlook to “negative” weeks after Prime Minister Mario Draghi’s resignation shook the country’s political landscape and expects disruption to energy supply to heighten its economic and fiscal difficulties.

“Although most European sovereigns could withstand such a shock to energy supplies without immediate rating pressure, the deterioration in their growth and fiscal metrics and increase in sociopolitical risks would weaken their resilience to further shocks,” it added.

Hungary, however, faces a low risk of supply cuts, as the state receives most of its gas from the Turkstream pipeline and has maintained cordial relations with Moscow.

“By contrast to the Nordstream 1 or Ukraine transit pipelines, Russian gas supplies through Turkstream are currently one third higher than in May this year,” Moody’s said.

The agency forecast a cut-off of Russian gas supplies would lead to a contraction of euro area gross domestic product (GDP) of 2.5% to 3.5% next year.

(Reporting by Juliette Portala Editing by Francesco Canepa and Mark Potter)