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Is it time to downgrade Europe's rating?

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Fitch Ratings recently downgraded the US debt rating from AAA to AA+ due to the worsening financial situation in the country, but what about Europe?

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While there are no clear black swans like a falling commercial real estate market in the US, European companies and citizens are starting to feel the impact of high-interest rates.

To begin with, several major banks in the region are forming huge reserves to cover potential losses from loans.

For example, British bank Barclays has reserved around $1.2 billion in the first half of this year to cover possible borrower defaults.

Like the US, households in Europe are experiencing a decrease in savings, weakening the previously resilient services sector.

And it gets worse.

Economists predict that the consequences of the European Central Bank’s measures will be strongly felt in 2024, resulting in a 3.8% contraction of the economy.

This is considered an optimistic forecast, as a decline of around 5% is possible due to high energy prices and the discontinuation of public assistance.

External factors also matter. 

If the US falls into a recession, the EU will lose a significant market for its goods, impacting company profits and the region’s GDP.

Additionally, a further slowdown in China will affect industrial production, investment, and sectors like luxury and mining. The results of the third quarter will provide a clearer picture.

Lastly, the geopolitical aspect must be recognized. Another round of worsening relations with Russia could lead to higher energy prices, posing a threat of another wave of inflation.

Final remarks.

Although credit rating agencies have not taken action against European countries, it is evident that numerous problems have accumulated over the past year and a half.

Whether these problems will lead to a full-blown crisis remains to be seen. However, it is advisable to prepare for potential stock market turmoil.

Using a stock screener to track changing trends is recommended.


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