TEXT-S&P report on European Government Finances

                                
 (The following statement was released by the ratings agency)
                                
 July 24 - Budgetary positions across the 27 EU sovereigns
have by and large improved over the past couple of years, a
trend that is mainly due to buoyant economic growth and the
associated boost to revenues, according to a Standard & Poor's
Ratings Services report published today, titled "European
Government Finances: Past Simple, Future Tense." Now that the
tide has turned for European economies, the question is to what
degree cyclical factors contributed to these favorable
budgetary performances, and, following from this, how the
ongoing slowdown will weigh on public finances in 2008 and
2009.
                                
 "The ongoing slowdown in economic growth across the EU will
undoubtedly have an effect on government finances," Standard &
Poor's credit analyst Marko Mrsnik said.
                                
 More than one-half of the countries analyzed for the report
were not able to achieve their targeted declines in the
expenditure-to-GDP ratio in 2007. The main reason for
worse-than-expected overall budgetary outcomes was the failure
to comply with the previously set expenditure targets. This in
turn was primarily related to weak control of government
spending, rather than to variations in the GDP growth
cycle--the latter being a frequently invoked reason on the part
of governments for incompliance with their own targets.
                                
 "Given that the large majority of the sovereigns' budgetary
plans for budgetary improvement in 2008 and 2009 are based on
expenditure-side adjustments, these findings generate doubts
regarding their credibility. This is particularly the case in
the countries which, despite favorable cyclical conditions in
recent years, have not fully complied with their own
expenditure targets."
                                
 From a sovereign ratings perspective, worsening budgetary
outcomes in countries with currently relatively high public
finance imbalances and high indebtedness--which in some cases
is coupled with low fiscal flexibility, such as in France,
Greece, Hungary, and Italy--would weigh on the current ratings,
despite some recent improvement in the latter three. The same
negative pressure also applies in countries where governments
have pursued clearly pro-cyclical fiscal policies, such as in
Romania and Lithuania. On the positive side, however, several
sovereigns managed to substantially improve their budgetary
situation over the past couple of years--namely Cyprus, Czech
Republic, Bulgaria, Finland, Germany, Slovenia, and Sweden.
                                
 Finally, the notable lack of expenditure control over the
past two years points to the importance of fiscal frameworks,
including fiscal rules and institutions. In this context, any
revisions of the rules now that the economic outlook has
turned, such as those currently debated in the U.K., are
harmful to their credibility in ensuring compliance with
budgetary targets.   ((Bangalore Ratings Team, +91 80 4135
5937, pavan.narayanan@thomsonreuters.com, Reuters Messaging:
pavan.narayanan.reuters.com@reuters.net))