European Lost Decade ‘Would Spare Few Corporates’
A decade of zero or low growth in Europe would weigh on most of the continent’s corporate sector, but the scale of the impact would vary significantly, according to Fitch Ratings. A scenario analysis of the potential winners and losers from a Japan-style lost decade puts utilities and telecom companies among those most at risk, while the gaming sector could benefit from deregulation as governments search for ways to increase tax revenues.
In a special report, entitled
‘Scenario: Effects of a European Lost Decade on Corporates’
, the credit ratings agency (CRA) examines the similarities and differences between Japan in the early 1990s and the current conditions in Europe, as well as how European companies would cope with zero growth across the European Union (EU) until 2018.
However, Fitch stresses that a lost European decade is not its baseline assumption and the CRA expects a recovery to come much sooner, with the eurozone returning to modest growth in 2014.
As well as the specific sector a company operates in, the primary factors determining the impact of a lost decade would be how reliant it is on sales in the slowest-growing developed European markets and the location of its major cost bases.
Utilities, with their exposure to big, developed markets and their necessarily-local cost bases are high on the list of sectors that suffer as growth slows, demand falls and power prices weaken. On top of that, they would also face the risk of additional taxation and further regulatory intervention if governments took action to ensure bills remained affordable for consumers. The five largest Fitch-rated utilities – Electricite de France, Enel, E.ON, Iberdrola and RWE – all have stubbornly high net debt, leaving them with limited rating headroom if conditions deteriorate further.
Telecom companies could face similar pressures due to the location of their customers and cost bases, though this would be tempered by the growth in international assets for some groups. A prolonged downturn would also compound the existing challenge of high investment requirements, driven by spectrum acquisition and the need to upgrade mobile networks to the latest technology.
According to Fitch’s analysis, gaming companies would continue to benefit from government deregulation as they would be seen as a potential source of additional taxation revenue. This would enable companies to expand into new businesses and markets, more than offsetting weaker consumer confidence.