Weak growth and low inflation has put some major euro zone sovereign credit ratings back on shaky ground, threatening the region's recovery from years of crisis. Data on Friday showed the bloc's economy growing just 0.2 percent in the third quarter. "At the start of the year we had thought that the trajectory of lower ratings had come to a halt, but the economic growth outlook has deteriorated since then," said Fitch's head of sovereign ratings James McCormack.
The other major agencies, Moody's and Standard & Poor's, take a similar view. Two of the bloc's biggest economies, Italy and France, are at risk of further downgrades. They are barely growing and prone to falls in consumer prices. All the "Big Three" rating agencies have a negative outlook on France and even Canada's DBRS, which remained more positive on euro zone states during the crisis, cut its French outlook last week.
S&P, which reviews Italy next month, has it on negative outlook and a downgrade to junk could be looming. The "market derived score" that S&P generates using credit default swaps puts Italy one notch below its actual rating of BBB-. All four agencies say their current ratings do not take account of a possible bloc-wide slide into deflation. Prices grew just 0.4 percent in October. Ratings matter because investors often use them as a benchmark for what they can buy.
The outlook has prompted some funds, like Santander Asset Management, to pull out of the bloc's lowest-rated sovereign debt. "Euro zone growth is weak and, with global growth slowing, is probably going to get weaker a number of major countries may experience ratings downgrades," said Adam Cordery, global head of European fixed income. Even Spain, which outpaced most of the bloc in the second quarter, faces barriers to further upgrades as political risks grow. S&P reviews Spain's BBB rating on Friday. Many investors find this kind of credit analysis redundant in an era when weak data only firms bets the European Central Bank will ease policy further.
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