RiskMarket RiskEurozone Deflation is Fitch’s Top Concern

Eurozone Deflation is Fitch’s Top Concern

Credit ratings agency (CRA) Fitch says that its Risk Radar has identified eurozone deflation as the largest potential risk to its credit ratings portfolio, despite the European Central Bank’s (ECB) quantitative easing (QE) programme.

This is because around one-third of Fitch’s corporate finance ratings are based in the region and as the world’s second-largest economy, largest importer and largest source of cross- border bank lending, deflation and weakness in the eurozone will have knock-on effects on other regions.

In its newly-published report, Fitch discusses these and other risks including emerging market slowdown and persistent oil price pressure.

Underlying inflation remains subdued and longer-term inflation expectations are still below the ECB’s target, adds Fitch. QE should help reduce the risk of prolonged deflation in the eurozone through a weaker euro and a boost to confidence. But the ECB’s previous easing measures, the introduction of targeted longer-term financing operations and private asset purchases, have so far had a limited impact on credit conditions and dynamics.

Downgrades would only occur if the bloc were heading into a protracted ‘Japan-style’ deflation, which could lead to self-reinforcing negative debt dynamics, making the downward spiral difficult to reverse – although this is not Fitch’s base case.

Emerging markets (EMs) face increasing pressures, primarily due to the structural adjustment in China and recession in Russia and Brazil. EM growth, which peaked at 6.9% in 2010, will slow to 3.6% in 2015, before edging up to 4.2% in 2016, according to Fitch’s forecasts.

Lower prices of oil and other commodities and tighter US monetary policy may affect EM external finances. The strong US dollar and higher US interest rates could also expose other EM vulnerabilities, such as high leverage, weak policy frameworks and political fragilities, so the risks for emerging markets are increasing.

The sharp fall in the price of crude oil since last summer is spurring spending and growth in developed economies by shifting wealth to energy consumers. At the same time, persistently low crude oil prices expose oil-dependent issuers across multiple sectors to heightened risks resulting from declines in revenue and cash flow. The largest financial impact is being felt across a disparate group of energy-producing sovereigns, corporates and public finance issuers whose forecast revenue streams have been cut substantially as oil prices have fallen to around US$50 per barrel.

The Risk Radar report frames the potential impact macroeconomic risks could have on Fitch’s ratings portfolio and their relative urgency. In today’s interconnected markets, similar issues may have an impact on multiple asset classes.

Related Articles

2017's most read: Correspondent banking: still in rude health?

Bank Relationships 2017's most read: Correspondent banking: still in rude health?

4m Henry Balani
IMF warns China on growing debt load

Asia Pacific IMF warns China on growing debt load

8m Graham Buck
South Africa’s economic recovery ‘could be a long haul’

Africa South Africa’s economic recovery ‘could be a long haul’

8m Graham Buck
Study finds 20 EU countries see rise in modern slavery risks

Headline News Study finds 20 EU countries see rise in modern slavery risks

8m Graham Buck
Rocky economic road ahead for Thailand

Asia Pacific Rocky economic road ahead for Thailand

9m Graham Buck
UK aims to become global hub for insurance linked securities

EEA UK aims to become global hub for insurance linked securities

9m Graham Buck
Crossing borders: transacting in Asia’s new reality

Asia Pacific Crossing borders: transacting in Asia’s new reality

9m Mark Evans
Economies set for highest government debt since 2000: Fitch

Deals & Markets Economies set for highest government debt since 2000: Fitch

9m Victoria Beckett