S&P cautious as eurozone economies stay sluggish

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The Independent Online

The financial strength of European companies would probably not improve significantly in 2004 because eurozone economies were still sluggish, the ratings agency Standard & Poor's warned yesterday.

Barbara Ridpath, chief credit officer at Standard & Poor's, said: "Credit fundamentals remain shaky. Europe has yet to know any real economic good news, and this is not much upon which to hang a corporate recovery."

The agency presented a cautious outlook for next year as it published its annual survey of European credit quality, showing it had slashed the ratings of a raft of companies this year.

In the year to 14 November, 27 per cent of companies outside the financial sector covered by Standard & Poor's were either assigned a negative rating or placed on creditwatch with a view to a possible downgrade. Across every sector, rating downgrades outpaced upgrades by 4.5 to one.

The picture was even worse in the insurance and utilities sectors. The ratings of insurers were cut in 207 cases, compared with just 37 improvements in creditworthiness.

The agency's concerns for next year are focused on these two sectors, after they saw a "sharp decline" in credit quality in 2003 due to an increased regulatory burden and more competition, in the case of utilities. Insurers have been struggling to make profits from underwriting after seeing investment returns decimated by falling stock markets.

However, despite the weakened state of some companies after three years of dire stock market returns, Standard & Poor's said the "low point for credit quality" had passed, after successful moves by most companies to manage a slump in demand and to cut debt.

But Ms Ridpath added: "Companies are reaching the limits of what they can do internally without the help of the economy."

British companies are unlikely to suffer the same problems as their continental rivals because the country's economy has been far more robust, Standard & Poor's believes.

But Britain still showed the most marked deterioration this year in credit strength across all sectors apart from finance. This was because British companies were more concerned with paying dividends and buying back shares than paying off debt compared with businesses in other parts of Europe, according to Standard & Poor's.

Banks showed the greatest improvement in credit quality in Europe this year, with downgrades of lenders halved to just 26, while 14 institutions saw their ratings improve.

Francois Veverka, head of Standard & Poor's in Europe, said: "We are not here to provide negative information per se, but we are also not a PR agency. We are providing an opinion."