LONDON (MNI) – Euro area sovereign profiles will remain under
pressure due to fragile confidence over the sustainability of public
finances, Fitch Ratings said in a report published Tuesday and it warned
of more states seeking EU and IMF support.

Fitch issued the following statement on its global credit outlook
report:

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.”

–London Bureau; Tel: +442078627492; email:
ukeditorial@marketnews.com

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