Moody's: Stabilising Conditions to Support Credit Quality of Global Debt in 2014

Stabilising economic and financial conditions around the world will support the credit quality of global debt during 2014, although the US Federal Reserve's wind-down of quantitative easing, along with the moderation of growth in China could have mixed-to-negative credit implications, Moody's Investors Service said in its "2014 Outlook -- Global Credit Conditions."


The wind-down of the US Fed's quantitative easing program, however, will likely lead to interest rates increasing globally, a generally negative credit development. Moody's expects the move toward normalisation of monetary policy in the US to have a relatively finite and temporary impact on most developed and developing economies. In Latin America, for example, the LATAM 5 sovereigns -- Brazil, Chile, Colombia, Mexico and Peru -- all have solid buffers against the tighter funding conditions that could result from QE tapering.


The positive news for credit markets is that growth in the US will drive strong credit performance across key sectors, while creditors will also benefit from economic recovery in several of the large European economies.


Growth in the US economy will benefit many corporate sectors in the US, particularly consumer products, lodging and retail, says Moody's. The recovering US housing market will also benefit some corporate sectors outside the US, for example the European building materials companies that rely on the US residential construction market for growth in cement demand.


US financial institutions are also benefiting from the more stable economic environment. Moody's expects the improvement in US banks' asset quality metrics that began in 2010 to continue in 2014.


In the US structured finance sector, many outstanding securitizations will benefit from the economic growth. Lower vacancies and higher rents for commercial spaces will improve the credit performance of several CMBS sectors. For US RMBS, the number of delinquent mortgages and mortgage loans in foreclosure will decline as the economy and the employment rate improve. For US CLOs, the default rate of the underlying debt will remain low as the economy continues to expand.


Among European corporates, consumer-related industries will benefit from signs of recovery in several large economies. For example, Moody's expects European retailers to report modest sales gains in 2014 following several years of decline.


Still, in many EU countries, the asset quality deterioration many financial institutions are experiencing has yet to abate. In a number of countries, problem loans will increase further, given persistent economic stress, particularly in peripheral euro area countries. Key downside risks for these financial institutions include negative surprises because of unreported or underreported asset quality deterioration and greater-than-expected capital shortfalls.


Neutral or positive economic growth in Europe will stabilise asset prices and benefit European structured finance securitisations. However, credit performance in RMBS, ABS and SMEs will vary by country because unemployment will remain high and growth will be low in some countries.


At the same time, the change in trajectory of the Chinese economy could have a negative effect in 2014. If moderation in China's rate of growth leads to lower demand for commodities, the impact will be far reaching. Lower Chinese demand will dampen revenue growth and government finances of commodity-exporting countries.


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