Shaky confidence casts doubt in credit outlook for Europe

Economic sentiment in the Eurozone continues to slip, increasing the likelihood of credit deterioration, according to an article published today by Standard & Poor's. The report, titled "Europe Credit Comment: Declining Confidence Compounds Risks To Credit Quality," says that a sluggish economic outlook, tight lending conditions, a strong euro, and elevated oil, food, and commodity prices dragged the Eurozone economic sentiment index down to a 32-month low of 97.1 in April, below its long-term average of 100 for the second consecutive month.
"Both consumer and business confidence indices have weakened markedly in recent months, heightening concerns over cyclical sectors that are particularly reliant on consumer spending and business investment," said Diane Vazza, head of Standard & Poor's Global Fixed Income Research Group. "Eurozone unemployment, however, remains at a record low and could provide support to consumer spending, offsetting some of the risks to economic growth. An accommodative monetary policy could also help mitigate some of the strain from credit-market volatility, but the European Central Bank remains reluctant to lower interest rates amid heightened inflationary pressures."
In the year-to-date, downgrades among nonfinancials have outpaced upgrades by 1.6x, a noticeable change from the same period last year when the number of downgrades and upgrades were near even. While no rated defaults have been recorded in Europe in 2008, the number of weakest links has risen to nine in April, compared with just six in December and in the same period last year. (Weakest links are entities rated 'B-' and below with negative outlooks or with ratings on CreditWatch with negative implications.) These nine entities are most vulnerable to default and, in the unlikely event that all of them default within the next 12 months, the Europe speculative-grade default rate would increase to 4.3% from 0.49% in March.