By Simon Miller
More than half the debt needed to be borrowed in the eurozone in 2012 will be from countries facing rating downgrades according to Fitch Ratings.
Speaking at its European Credit Outlook event in London, group managing director and head of Fitch’s sovereign group David Riley said that with eurozone countries needing to borrow approximately €2trn (£1.65trn) in 2012, “the sovereign credit and economic challenges the region faces this year are underlined by the fact that more than half of that debt is by governments at risk of rating downgrades".
He added that the ability for countries to generate sustained economic growth this year would be a key issue, with Fitch forecasting a shallow recession for the eurozone in 2012 as tough austerity measures continue to bite and consumer and business confidence remains weak.
“The risk of a vicious cycle of stagnating economies fuelling worries over the solvency of some governments and banks is a real one. More positively, the unwinding of the imbalances that led to the crisis is well underway and the headwinds from deleveraging and austerity should begin to ease towards the end of the year, supporting a gradual economic recovery that could mark the beginning of the end of the crisis," added Riley.
Managing director in Fitch’s financial institutions group James Longsdon warnd that 2012 sees a north/south split in terms of the issuer default rating outlooks for major western European banks.
“The Outlook is mostly Negative for banks in countries like Spain, Italy and Portugal, primarily reflecting the rising sovereign and economic concerns and their implications for banks' funding costs and access and for their asset quality. The downside risk is cushioned to a degree by an increasingly accommodative European Central Bank but exacerbated in Spain by the country's intense real estate crisis," he said.
Longsdon added: "In the north of the region, Stable Outlooks are more commonplace. This partly reflects less acute economic and funding pressures but also, for a number of issuers, Fitch's expectation that the willingness and ability of national authorities to support their major banks remains high, should this be needed.”
Meanwhile Fitch said structured finance transactions in Europe had held up very well throughout the crisis with expected total losses to remain very low at 2.6% of original outstanding balance. In particular, transactions backed by consumer assets such as residential mortgages and auto loans were performing well helped by low interest rates, underpinning Fitch’s overall stable rating outlook for the sector.
“This is challenged though by sovereign and bank credit issues, particularly in a country like Italy where bank credit quality and sovereign credit are getting closer to the point where we may no longer be able to support AAA ratings on structured finance transactions," said Marjan van der Weijden, managing director of structured finance.
Fitch added that although the outlook for the covered bond sector was stable for two thirds of the rated portfolio, there was a clear split between peripheral Europe - Greece, Portugal, Ireland, Spain, Italy and Cyprus - versus the rest of the world.
“Twenty-six per cent of our ratings are on Rating Watch Negative predominantly because of sovereign and bank credit concerns in peripheral Europe. Any further credit deterioration reflected in negative rating actions of these sovereigns and banks in these countries could result in rating actions on the covered bonds. On the other hand, covered bond programs in more stable countries are not so sensitive to further credit deterioration," said Fitch’s managing director of covered bonds Helene Heberlein.