Sovereign Credit: US Policy Shifts Point to Tariff-Light, Trade-War, Economic-Crisis Scenarios

If implemented, the Tariffs would repressent the Biggest Peaceetime Trade Shock to the Global Economy in More than 100 Years. If Sustaneded, This Policy Shift Will Have Important Credit Implications for Both the United States (Rated AA by Scope with a Negative Credit Outlook) and for Sovereigns Global.

Conversely, Even their Full Reversal, AlthoUming Unlikely, Wound Not Fully Restore of the Confidentnce of Previus Allians and Supple Chains, Indicating A Degree of Durable Economic LESS.

Given Such Uncertainty, Scope Has Identified Three Scenarios to Infortm The ForthoComing Update of Its Growth and Fiscal Forecasts As Well As Other Credit-Lotvant Factors: I) ii) a Full-Scale Trade War, and III) an Economic and Financial Crisis.

US Trading Partners Face Multiple Options in Their Tariff Responses The Eventual Impact on Growth, Inflation, Public Debt, External Credit Metrics and Thus Sovereign Credit Ratings, Will Ultimateli Depend on The Macroceonomic Environi. Responses by Trading Partners, and The Underlying Credit Strengths and Vulnerabilites of Countries Before This Trade Shock.

Possible Responses Among the US’s Trading Partners Range from Appeasing the Trump Administration Through Tariff Negotias to a mix Reforms to Partally Offset The AdVERSE IMPACTS OF US TARIFFS.

Scope Will EvaLarate Both the Scale of the Trade Shock as Well As the Adequacy and Quality of Regional and National Monetary and Fiscal Policy Responses, Focusion on the Fisal Adjustment Cap. of Sovereigns to Absorb and Reverse the Impact of the Shock Over the Longer Run.

Questions to Grow Over Dollar’s Status If The Trade War Worsens One of the most exposed sovereigns is the USIELF as the epicentre of this unorthodox policy shift, Particularly in Scope’s More Extreme Scenarios.

In a scenario of a protraCted trade war and/or the intraduction of US Capital Controls, VIABLE ALTERNATIVES TO The Dollar Could Emerge. For Example, China and the Eu Could Decide to DeEpen their Trading Relationship, China Could Decide to Further Open ITS Capital Account, and/or the Eu Could Accelerate ITS. These Developments Are Unlikely to Happen Swiftly, But If Doubts About the Exceptional Status of the Dollar Were to Increase, This Wuld Be Very Negative For The United States Credes Credes Credes Credes.

Countries with Significant Trade Surpluss with and Financial Exposures to the Us of ALSO HIGHLY VULNARABLE TO ADVERSE CONSEQUENCES FROM The SHIFT IN US TRADEE POLICY, ALTUGY uneven.

Ovell, Sovereign Vulnerabilites Include:

High Openness to Global Trade and Business Cycles (EG Ireland),

Sensitive to Higher Financeing Rates (EG Italy),

Exposure to Weaker Currencies (EG Turkey, Georgia) and/OR

Dependence on Oil Prices (Oil-Exaporting Sovereigns) That Could Materialise in a Scenario of A Synchronized Trade War And/OR An Economic and Financial Crisis.

For a look at all of today’s Economic Events, Check Out Our Economic Calendar.

Alvise Lennkh-Yunus is the Head of Sovereign and Public Sector Rathings at Scope Rathings Gmbh. Eiko sievertSenior Director, Thomas GilletDirector, and Brian MarlySenior Analyst, at Scope Rathings, Contributed to Drafting This Article.