Continuing Eurozone Crisis Will Weigh On Global Sovereign Debt Market In 2012

by: Research Recap

The worsening of the eurozone crisis since July constitutes a significant negative shock to the region’s economy and financial sector with adverse consequences for sovereign credit profiles across the region and further afield, according to Fitch Ratings’s outlook for 2012.

In the absence of a “comprehensive solution”, with politicians instead taking a gradualist approach to putting in place the institutional and policy framework for a more viable eurozone and ultimately greater fiscal union, Fitch expects the eurozone crisis to persist and be punctuated by further episodes of severe financial market volatility.

In Fitch’s opinion more active and explicit commitment from the ECB is necessary to mitigate the risk of self-fulfilling liquidity crises for solvent Euro Area Member States (EAMS).

Tightening financial conditions, falling confidence and new fiscal austerity measures have recently led Fitch to revise down its forecast for eurozone GDP growth to just 0.4% in 2012, from 1.6% in 2011. However, the agency forecasts emerging market (EM) growth at a still fairly robust 4.9% in 2012, from 5.6% in 2011, bolstered by domestic demand growth and greater fiscal and monetary policy flexibility.

Nonetheless, Fitch warns that a further intensification of the eurozone crisis has the capacity to inflict considerable damage on EMs through trade exposure and financial linkages. Emerging Europe (NYSE:EE) is by far the most exposed region, but others would not be immune.

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