Macro factors will dominate credit markets in 2011 – Fitch

Friday, 21 January 2011 00:01 -     - {{hitsCtrl.values.hits}}

(Fitch Ratings-London/New York-19 January 2011) Fitch Ratings says in a new global credit outlook report that while an economic recovery is occurring, it remains fragile with possible pitfalls. In this environment, Fitch expects macro factors to continue to dominate credit markets. However, although macro risks remain, Fitch’s rating outlooks are continuing to stabilise across most sectors.

“The overall continuing stabilisation of outlooks reflects a combination of improved credit profiles and rating downgrade action, followed by rating stabilisation at lower levels in many cases,” says Monica Insoll, Managing Director in Fitch’s Credit Market Research group.

Outlooks on insurance ratings, which have had the most negative bias since Q408, have stabilised rapidly over recent quarters as asset risk is increasingly captured within the current rating levels. Corporate and financial institutions rating outlooks are also largely returning to more normal levels of stability.

However, a small number of market segments remain challenged. In structured finance, the rating outlook for US residential mortgage-backed securities is negative due to the continued falls in house prices, the large inventory and lengthening loan resolution timelines. Fitch expects the magnitude and severity of negative rating actions in 2011 to decline substantially, compared with prior years’ levels.

Developed market sovereigns, notably peripheral euro area member states (EAMS), are struggling with large fiscal financing needs against the backdrop of fragile and volatile funding markets. Many subnationals, in both Europe and the US, share these problems. The rating outlook for these issuers is negative in certain segments. “The global recovery remains dependent on continued emerging market dynamism and accommodative policy support, especially from central banks,” says David Riley, Group Managing Director in Fitch’s Sovereign team.  In the US, there has been determined positive action to boost growth, notably through the extension of tax relief and a second round of quantitative easing (QE2), to which the financial markets have responded enthusiastically. However, there is a risk that QE2 could undermine confidence in the US dollar and raise inflation expectations. Also, together with exceptionally low interest rates, QE2 may result in yield-seeking capital and financial flows undermining economic and financial stability in stronger-growing emerging markets.

In the euro area, support measures have been substantial, although at times hampered by inconsistent communication from the region’s policymakers. Confidence in the sustainability of public finances and bank liquidity and asset quality will remain fragile and sovereign credit profiles will continue to be under pressure. It is likely that there will be further episodes of extreme market volatility and a risk that more EAMS will be forced to seek financial support from the EU and IMF. Fitch believes the euro zone will “muddle through” rather than break up in the wake of systemic sovereign debt defaults or become a fully fledged fiscal union.

The full report, entitled “The Credit Outlook”, covers all major asset classes on a global basis and is available at It is published semi-annually. Fitch’s individual sector outlooks are available on