A renewed Eurozone crisis would be the biggest risk to the global economy, said Fitch Ratings. The credit ratings agency polled more than 350 investors at events held in Hong Kong and Singapore, and found that another flare up in the Eurozone is the top risk for the world’s economy.
The finding come as Greece and its creditors tussle over new funding terms to keep the beleaguered southern Eurozone peripheral from avoiding a default.
At the same time however, the European Central Bank this month unleashed its €60bn-a-month monetary stimulus in a bid to prop up the euro area economy.
In a news release, Fitch said that it’s ‘Risk Radar’ has identified Eurozone deflation as the largest potential risk to our credit ratings portfolio, despite the ECB’s quantitative easing programme.
“This is because approximately 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,” said the ratings firm.
It said that underlying inflation remains subdued and longer-term inflation expectations are still below the ECB’s target.
Though QE should help reduce the risk of prolonged deflation through a weaker euro and a boost to confidence, the ECB’s previous easing measures, the introduction of targeted longer-term financing operations and private asset purchases, so far have 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. This is not our base case,” said Fitch.
It added that emerging markets face increasing pressures, primarily due to the structural adjustment in China and recession in Russia and Brazil. Fitch said emerging-market growth, which peaked at 6.9% in 2010, will slow to 3.6% in 2015, before edging up to 4.2% in 2016.
“Lower prices of oil and other commodities and tighter US monetary policy may affect emerging-market external finances. The strong US dollar and higher US interest rates could also expose other emerging-market vulnerabilities, such as high leverage, weak policy frameworks and political fragilities, so the risks for emerging markets are increasing,” added Fitch.
The ratings firm said that 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, Fitch noted that the 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 $50 per barrel,” said the ratings agency.