In its six-monthly The Credit Outlook report, Fitch Ratings says that the Eurozone crisis and US fiscal and debt challenges will drive the global credit outlook this year.
While the Outlook on seven of the 17 Eurozone member countries remains Negative, the ECB’s “Outright Monetary Transactions” (OMT) programme in early September effectively addressed near-term liquidity risks for troubled Eurozone sovereigns, buying time for the necessary but painful adjustments required to secure solvency. However, notwithstanding some progress on banking union at December’s EU summit, significant challenges still confront policy-makers, both in terms of moving towards greater fiscal and financial risk-sharing and in breaking the negative feedback loop between sovereigns and their banking systems. Policy complacency remains a risk for 2013.
The extended and unresolved US fiscal and debt ceiling negotiations will also be key to global risk appetite. The fiscal cliff has been avoided but difficult decisions have been deferred. The decisions on spending will now be taken concurrently with negotiations on the raising of the statutory debt ceiling which was reached on 31 December, with extraordinary measures expected to last until the end of February. Failure to reach agreement on raising the debt ceiling in a timely manner would undermine confidence in the United States as a reliable borrower and prompt a review of its ‘AAA’ rating.
Fitch expects the weak operating environment for banks to continue. Bank credit weakness is most pronounced in the Eurozone with a weak operating environment and continued sovereign challenges. The US situation is more stable, but profit pressures raise concern on execution of growth and expansion strategies. Support remains a key factor for 2013, but Fitch expects this to wane with developments of a banking union and resolution regimes.
The proportion of ratings with a Negative Outlook or on Rating Watch Negative remains high across many sectors, primarily driven by the unresolved Eurozone crisis. The cross-sector shrinkage of the universe of highest grade ratings (‘AAA’ and ‘AA’), which has occurred in the years since the start of the financial crisis, was arrested with little change in this group in H212. However, only 23% of sovereigns, 7% of financial institutions and 2% or corporates were at this rating level as at end-2012.
‘The Credit Outlook’ report provides an overview of Fitch’s outlook across all rated sectors and regions, identifying the main macro factors that will drive credit trends over the next 12-24 months. It is available on the Fitch Ratings web site.
