S&P Global Market Intelligence

European Horizons

Credit Conditions Europe Q4 2021: Rampant Recovery, New Risks

Key Takeaways

Overall: Economic activity is rebounding in Europe as COVID-19 infection rates decline, vaccination rates continue to rise, and social mobility returns. The strength of the recovery, led by consumer demand, has added to supply chain disruptions that are likely to persist into 2022. Although the emergence of vaccine-resistant coronavirus strains remains an elevated risk, S&P Global Ratings see this as a risk to the pace of economic growth rather than a risk of contraction.
Risks: Economic growth has proven stronger than many expected, but pressures on earnings--supply chain dislocations, inflation, and related cost pressures--are rising. If these elements persist longer than S&P Global Ratings currently expect, and major central banks take first steps to taper bond purchases, it could presage tighter financial conditions for borrowers, including a rise in interest rates sooner than they now forecast. Higher borrowing costs could hurt weaker borrowers, given the huge step-up in aggregate debt since the pandemic, even though debt servicing costs remain historically very low.
Credit: Financing conditions remain favorable, with yield-hungry investors increasingly turning toward lower-rated debt. What’s more, fiscal policy remains supportive, and is becoming more targeted toward sectors hardest hit by the pandemic. These factors continue to limit the extent of credit deterioration.

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