Europe’s sovereign debt crisis may pressure ratings of Asian countries such as Sri Lanka, India and Indonesia by disrupting global funding markets, according to Fitch Ratings.

Sri Lanka is most at risk due to its high external-funding needs and weak balance sheet, said Andrew Colquhoun, head of Asia-Pacific sovereign ratings at Fitch. The same issues also make India and Indonesia vulnerable compared to similarly graded peers, he said.

The European crisis is likely “the single biggest” external issue that may affect credit ratings in emerging Asian economies, Colquhoun said in an e-mailed response to questions.

“If the pressures coming from overseas or from other parts of the world were to intensify, the countries that could most quickly see negative pressure develop on sovereign credit profiles” include Sri Lanka, India and Indonesia, Colquhoun said earlier in the day at a conference in Hong Kong. “This is not to say that we are about to take rating action on any country mentioned here.”

Sri Lanka’s gross external financing requirements this year equate to 95 percent of the country’s reserves, according to Fitch projections. Indonesia and India both need outside funds totaling at least 30 percent of their sovereign reserves, Fitch’s presentations show.

India and Indonesia are rated “BBB-“ by Fitch, its lowest investment grade. Sri Lanka is ranked three levels lower at “BB-.”

Europe’s leaders are struggling to control the region’s debt after Spain was downgraded to BBB by Fitch, and agreed to a 100 billion euro ($125 billion) bailout to recapitalize the country’s banks. Greeks vote this weekend in an election that may dictate whether the country stays in the euro.

Any Greek exit from the common currency would be “massively economically, financially and politically damaging,” and would probably lead to downgrades of Spain, Italy, Ireland, Portugal and Cyprus, Colquhoun said. The euro area is more likely to “muddle through” than break up, he said. 

(Bloomberg)