Eurozone crisis & US fiscal cliff risk dominate sovereign outlook


thenews.com.pk
December 20, 2012

Fitch Ratings says in its latest bi-annual global Sovereign Review and Outlook report that the weaknesses in the major advanced economies (MAEs) – dominated by the continuing eurozone crisis and the looming threat of the US fiscal cliff are exerting a negative influence on global sovereign credit quality. While emerging market (EM) economies are proving more resilient, their continuing exposure to the MAEs, combined with their own vulnerabilities, is constraining the upward rating momentum of EM sovereigns.

The report notes that the ratings of seven of the world’s 10 largest economies are currently on Negative Outlook, including three major ‘AAA’-rated sovereigns the US, the UK and France, highlighting the strained credit quality of the countries underpinning the global economy. Fitch expects to resolve these three Negative Outlooks in 2013, against a challenging backdrop, with the eurozone back in recession and a US recovery not expected to gain traction until the latter part of 2013.

The eurozone crisis has entered a period of relative calm, influenced heavily by the announcement of the European Central Bank’s (ECB) “Outright Monetary Transactions” (OMT) programme in early September. Mario Draghi’s policy initiative has 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 last week’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.

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