In its 2013 Outlook: Global Sovereign Review, the ratings agency also highlighted the looming US fiscal cliff as “the single biggest, near-term threat to the world economy”.
Fitch has seven of the world’s ten largest economies on negative outlook, meaning they are at risk of being downgraded in the near term. These countries include AAA-rated sovereigns such as the UK, the US and France.
Despite strained credit quality of the countries such as these, which underpin the global economy, sovereign bond yields eased throughout much of 2012 as immediate concerns about the eurozone crisis abated and the world’s major central banks maintained their loose monetary policy.
The agency said: “Fitch is concerned that the current easing of market pressure on sovereign bond yields – combined with the specifics of 2013’s electoral calendar, including Italian and German general elections – could induce complacency and slow policy momentum to a crawl.”
It added that eurozone policymakers still face “significant challenges” in moving greater fiscal union and breaking the negative feedback loop between sovereigns and their banking systems.
However, the announcement of the European Central Bank’s outright monetary transactions programme in early September and the more recent Troika agreement to provide additional debt service relief measures to Greece were highlighted as positive developments.
The problems being created by the fiscal cliff in the US – a $600bn package of automatic tax increases and government spending cuts that threatens to shave up to 5% of the country’s economic growth – were also stressed.
“Fitch has identified the US fiscal cliff as the single biggest, near-term threat to the world economy, given its potential to tip the US into an unnecessary and avoidable recession, with negative implications for global growth,” the outlook said.
The ratings agency’s base scenario assumes US policymakers will steer the country away from the cliff by making compromises that will lead to a material fiscal tightening of 1.5% of GDP. But the US could still be downgraded if negotiations over the fiscal cliff and the country’s debt ceiling are too prolonged.
In addition, Fitch concluded that global sovereign credit quality could deteriorate further in 2013.
“Weaknesses in the major advanced economies – dominated by the continuing eurozone crisis and the looming threat of the US fiscal cliff – are exerting a negative influence on global sovereign credit quality,” the group warned.
