The World Economy According to Fitch

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Fun with Fitch on Tuesday, as the rating agency published its first Credit Outlook for the world economy overall — effectively a handy digest of its ‘ratings universe’.

Sovereign debt looms large, as could be expected.

At the same time, negative outlooks have been stabilising across the asset classes rated by Fitch since Q3 09 — except for structured finance, thanks to US RMBS.

This chart shows the trend (click to enlarge):

However, break down the sovereign trend — and it transpires that negative outlooks for developed market sovereigns are on the cusp of overtaking their emerging peers:

Ironic, and not a little historic, no?

And Fitch makes an interesting point about the sovereign debt poster-child du jour:

…the sovereign currently (May 2010) under most pressure "” Greece ("�BBB'/Negative) "” did not incur large fiscal costs in support of its financial sector, and did not experience a severe recession. Rather, the crisis of confidence afflicting Greece reflects previous episodes of fiscal mis"�reporting and indiscipline, as well as concerns over the political will and capacity to implement the fiscal and structural reforms necessary to place public finances on a sustainable path.

But…

Greece's EUR53bn gross financing requirement for 2010 pales into insignificance against total borrowing by European governments this year "” which Fitch projects will be EUR2,200bn, slightly greater than the historical high of 2009. The sharp increase in short"�term debt by many sovereign borrowers is a source of concern, due to the higher exposure to interest rate shocks "” and, potentially, financing shocks.

Financing shocks, plus difficult fiscal consolidation – potentially a volatile mix.

In that case, Fitch seems to suggest that the sovereign spectre now extends far beyond Europe. As the agency warns, emphasis FT Alphaville’s:

While the current market and media focus is on the eurozone, most high"�grade sovereign governments face significant budgetary adjustment in the order of 4pp"�7pp of GDP "” just to stabilise the public debt ratio at the elevated levels projected for end"�2011. The potential for negative "fiscal surprises"� and volatility in government bond markets "” including beyond the eurozone "” will remain high for the foreseeable future.

Against this backdrop and amid heightened concerns over sovereign creditworthiness, governments will need to respond in a timely and credible fashion to ensure that budget targets are met and debt levels stabilised "” and eventually lowered "” over the medium term. The governments facing the most challenging budgetary adjustment over the medium-term are Japan, Ireland, the UK, Spain, the US and, to a lesser degree, France.

To say nothing of other credit risks perhaps waiting out there, including unresolved bids to reform financial institutions…

A protracted weak economic recovery could have an impact on outlooks, as could various changes in regulatory environments over time. There is currently much debate at both national and international levels on the shape of future banking regulation. Broadly speaking, these discussions fall into two areas: a change to address idiosyncratic risks, and to address systemic risks. Although these measures should make banks less likely to fail, they may inevitably curb their profitability. Addressing the systemic risks, arising especially from the size and interconnectedness of large international financial institutions, is considerably more challenging, and progress is likely to be slow.

…To the future of corporate debt refinancing:

The availability of refinancing for corporate debt becomes a factor for large amounts of debt maturing in 2013 and 2014. As maturity dates approach without better refinancing opportunities in the market, any inability to achieve refinancing will move over time from becoming a possibility to a greater likelihood. If there is no significant easing in lending conditions, this could cause further downgrades of specific transactions. However, as far as US leveraged loans are concerned, Fitch believes that the gap between demand and supply is much smaller than absolute debt maturities imply.

Oh, it’s never boring on Planet Fitch.

Related links: Fiscal squeals - FT Alphaville The incredible quantum credit rating – FT Alphaville What happens when the risk-free rate isn’t free? – FT Alphaville What happens when the world defaults?- FT Alphaville

This entry was posted by Joseph Cotterill on Tuesday, May 18th, 2010 at 15:56 and is filed under Capital markets. Tagged with corporate bonds, credit ratings, credit risk, fitch, Fitch Ratings, Sovereign debt, sovereign risk. Edit this entry.

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