Sovereign debt a risk to credit ratings: Fitch

Credit ratings are stabilising across most sectors, with the notable exception of high-grade sovereigns and structured finance, according to a new global report from Fitch Ratings.

“Fitch’s rating outlooks have been stabilising across most asset classes since the third quarter of 2009,” said Monica Insoll, managing director in Fitch’s Credit Market Research group.

“However, the economic recovery supporting the stabilisation of ratings is fragile and has not yet reached a self-sustaining phase.”

David Riley, group managing director at Fitch for Sovereign Ratings, says that sovereign credit profiles remain under pressure following intervention measures for the financial sector.

“However, the deterioration in public finances primarily reflects the severity of the global recession, which has hit tax-rich sectors such as finance and housing especially hard, and driven up welfare spending,” he said.

Sovereign issues are overshadowing credit markets, while corporate credit profiles will be at risk if fiscal tightening dampens economic growth, according to Fitch.

The report highlights that the market assumption is for a sluggish recovery, meaning the most significant risk to ratings is a double-dip recession.

This could be triggered by the upcoming fiscal tightening cycle, but Fitch expects its effect on growth to be delayed due to lags in the economy.

Other credit risks include refinancing challenges, while banks also face significant regulatory challenges. Asset quality is a concern with housing and commercial property values remaining weak in many developed markets, while the risk of new asset bubbles is increasing in Asia, especially in China, according to Fitch.