Fitch: Europe Credit Investors Calm on Tapering Economic Impact

Fri Nov 8, 2013 8:03am EST
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LONDON, November 08 (Fitch) Just 12% of European credit investors think the Fed's eventual tapering of its bond-buying programme will lead to slower global growth, according to Fitch Ratings' latest quarterly investor survey. However, over 40% expect tapering to cause significant market volatility. Overall, just over 60% think tapering will have a limited impact on the real economy. The response is in line with the view identified in our previous survey, conducted in July, when nearly three-quarters of investors thought central banks would reduce stimulus in a timely and smooth manner, following the initial shock to financial markets caused by Fed Chairman Ben Bernanke's comments on the Fed's exit strategy in late May. But 12% of respondents to our latest survey thought that the Fed would stick with QE for too long, leading to inflation and asset bubbles. Investors remain conscious of the risks associated with US stimulus withdrawal. Those who thought Fed tapering would slow growth also thought it would expose weaker emerging markets to financing problems. In our view EM countries with current account deficits, large external financing needs and foreign-currency liabilities that have experienced strong recent credit growth are most vulnerable to changes in investor sentiment from Fed tapering and eventual monetary tightening. We have examined this in several publications this year, available at We do not anticipate widespread EM credit distress, owing to secular improvement in credit fundamentals, reducing risks from tighter global liquidity, higher interest rates and FX risk. But the potential for the Fed move to increase volatility adds to worries about slowing EM growth. Credible, coherent economic policy management is likely to remain the most effective shield for sovereign credit profiles. The wide range of survey responses shows the high degree of uncertainty regarding the eventual impact of Fed tapering. More broadly, the unprecedented nature of QE undertaken by the large central banks in the major advanced economies (MAEs) makes judging the impact of an exit on rates, risk premiums, financial markets and the global economy highly uncertain. We think the Fed will attempt to unwind stimulus gradually, with timing dependent on economic data. We still expect bouts of market volatility. A further spike in long-term yields and subsequent market turbulence are a key downside risk. The alternative scenario analysis in our most recent "Global Economic Outlook" examined the potential impact of higher long-term yields. In our simulation, world GDP growth was 0.3pp weaker in 2014 and 2015 in the event of a 120bp rates increase from mid-September in the US, UK and eurozone, and a 100bp increase in risk premium for BRIC economies and other EMs, excluding China. Of the MAEs, the US and UK were most sensitive owing to higher sensitivity to long-term financing costs due to the larger role of capital markets in private-sector financing, and exposure to asset price falls through, for example, private pension savings. Brazil and Russia had the largest slowdown among the BRICs, partly because in the model the risk premium shock would trigger monetary tightening to avoid currency depreciation. Fitch's Q413 survey closed on 4 November. It represents the views of managers of an estimated EUR7trn of fixed-income assets. We will publish the full results during November. Contacts: Monica Insoll Managing Director Credit Market Research +44 20 3530 1060 Fitch Ratings Limited 30 North Colonnade London E14 5GN Ed Parker Managing Director Sovereigns +44 20 3530 1176 Mark Brown Senior Director Fitch Wire +44 20 3530 1588 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.