Scope Ratings says in its Sovereign Outlook 2026 that geopolitical developments will remain fundamental for sovereign credit profiles, particularly in Europe.

This includes uncertainties under the volatile US trade and foreign policy but also China’s dominance over key raw materials crucial for global supply chains as well as the impact of its growing competitiveness in high-value goods exports.

For European sovereigns, significant uncertainty persists regarding the outcome of any potential ceasefire negotiations between Russia and Ukraine, or alternatively, military escalation. Either scenario would carry significant economic, fiscal and governance implications for Europe.

Domestic conditions also pose challenges to advance structural reforms

“Domestic factors also play a crucial role, not least the challenging fiscal outlooks and growing political polarisation which make it increasingly hard to implement structural reforms,” says Carlo Capuano, deputy head of Sovereign and Public Sector.

Rating risks offset potential for stronger economic growth, fiscal resilience

“The significant geopolitical and fiscal risks outweigh the potential positive impacts from stronger growth and emerging pockets of fiscal resilience in the EU,” says Capuano.
Among the potential tailwinds in Europe, he cites possible gains linked to AI-driven productivity growth and implementation of reforms in Europe related to the Next Generation EU funding programme.

In addition, many European sovereigns retain considerable funding flexibility, not only in southern euro area countries which are benefiting from fiscal consolidation but also countries like France despite ongoing difficulties in reducing budget deficits.

Scope’s overall outlook is reflected in recent rating actions on the US – downgraded to AA-/Stable in October and France, affirmed at AA- but with the Outlook revised to Negative, in September – primarily due to concerns about high budget deficits, rising debt-to-GDP and a challenging political outlook.

Rating convergence trend since 2019 set to continue

Another theme is the continued ratings convergence among investment-grade sovereign borrowers. While there has been upward pressure among previously lower-rated sovereigns such as Cyprus, Greece, Italy, Portugal and Spain, there is downward pressure on Austria, Belgium and Finland in addition to France and the US.

“We are clearly seeing challenging fiscal dynamics among several highly rated sovereigns exacerbated by rising political polarisation in many countries,” says Eiko Sievert, Executive Director at Scope.

“Governments face a very delicate balancing act between lowering budget deficits, stabilising debt levels, while meeting rising interest payments and voters’ demands for high and increasing social spending, often linked to demographic pressures, while also addressing persistent security concerns. Implementing reforms to achieve fiscal sustainability while also maintaining political stability will be a significant challenge.”

How governments manage these pressures will be central to inform future rating trajectories.
Failure to meaningfully advance budgetary efforts could result in weaker credit profiles over the medium-term while near-term market volatility could be addressed via the wide range of intervention tools at the disposal of central banks, including the European Central Bank, says Sievert.

Download the Sovereign Outlook 2026 presentation.