Fitch: U.S. Default Remote; Warns on Greek Contagion

Fitch Ratings, in a report published Wednesday, said it considered the risks of a U.S. default remote and highlighted the need for a resolution to the Greek crisis to avoid European Union contagion.

The rating agency said while credit has generally stabilized, the outlook is being dominated by the big macro themes and the risks to sovereign credit.

Fitch says in a new global credit outlook report that the credit environment continues to be dominated by macro themes and issues confronting sovereign credit, from austerity to bailout packages to debt ceilings. The benefits and pitfalls of strategies to improve growth and trim deficits are not yielding sustained results in key developed markets. However, in the face of such macro risks, Fitch’s rating outlooks are continuing to stabilise across most sectors.

“There is a striking disconnect between the severe pockets of uncertainty and a backdrop of generally stabilizing credit. Markets are focused on an exceptional confluence of events affecting confidence, so the question is whether these big-ticket issues will be resolved before positive trends are reversed,” said chief credit officer John Olert.

“Rating outlooks have continued to stabilize, with just under 7% of ratings now on negative outlook — down from a peak of 18% in [third quarter 2009] and on a par with the level in [first quarter 2008],” said Monica Insoll, managing director in Fitch’s credit market research group.

While this trend partly reflects a recovery of credit-profile strength, in many sectors ratings have stabilized at a lower level than pre-crisis. Furthermore, the outlook for ratings is more negative in some important areas, notably euro zone peripheral countries. The problems in these countries have a knock-on effect for their respective local and regional governments, which are getting squeezed between reduced state funding and lower tax collection and other revenue.

In the United States, the outlook is negative for a small number of revenue-supported public finance sectors. However, this shift comes from a backdrop of overall very strong credit profiles. A negative bias to outlooks also remains in U.S. residential mortgage-backed securities, with house prices still on a declining trend and the loan foreclosure process having become more complex.

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