Economic deterioration changes country ratings

Economic deterioration changes country ratings article image
Eight developed countries have been removed from positive watch by Coface after the deterioration of the average strength of companies in Europe and the United States over the past year. The volatility of financial markets has increased as consumer sentiment drops due to the eurozone crisis and the US economic policy impasse. As a result consumers and investors could begin suspending their purchases. Chief economist of Coface, Yves Zlotowski says confidence weighs heavily on economic activity. "The negative changes of country risk assessments confirm that we have left the phase of global improvement in payment behaviour of companies observed since the second half of 2009." Distrust towards banks because of their exposure to sovereign risk poses credit concerns for European companies. In the first half of this year, credit contracted in four countries including Greece, with Coface recording further progression of overdue payments and weakened growth in the monetary union expected for the rest of the year. The risk assessments for Greece and Cyprus have been downgraded again after having already been dropped last June. Greek public deficit has increased and lending to businesses has already decreased by seven percent over the last year. The positive watch on the A2 risk assessments of five other eurozone economies including Germany, Austria and Belgium have been removed and growth is not expected to improve over the rest of this year. The A3 and A4 assessments of Italy and Portugal respectively have also been downgraded with economic prospects for both looking poor. Zlotowski  says: "The major challenge for European construction is setting up measures to stem the contagion of the Greek debt crisis to other eurozone economies. This will be the key element which will ensure that the slowdown does not turn into recession." Downwards revision of US growth has resulted in the removal of positive watch from their A2 rating. Growth has been restrained after lack of confidence from households and businesses has resulted in political strain over how to handle stimulus plans. "The absence of consensus between political actors on the solutions that should be taken in order to tackle the sovereign crisis or the weak American growth is one of the drivers fuelling this crisis of distrust," Zlotowski adds. The economy is likely to slow down heading into 2012, resulting in increased bankruptcies for small to medium businesses overly exposed to regional banks and struggling with reduced access to credit. Company activity is likely to die down despite growth in demand from emerging economies expected to increase by close to six percent in 2011. There is some positive news, however. The A4 risk assessment of Iceland has been placed on positive watch after renewed growth, since it was downgraded in March 2009. The country’s foreign debt remains high despite improvements and the banking sector has been cleaned up. Thailand’s A3 negative watch has also been removed after politics in the country have stabilised and it has shown resistance to global turmoil.


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