OREANDA-NEWS. April 01, 2015. Fitch's Risk Radar has identified eurozone deflation as the largest potential risk to our credit ratings portfolio, despite the ECB's quantitative easing programme. This is because approximately one-third of Fitch's corporate finance ratings are based in the region and as the world's second-largest economy, largest importer and largest source of cross- border bank lending, deflation and weakness in the eurozone will have knock-on effects on other regions.

In a report published today Fitch discusses these and other risks including emerging market slowdown and persistent oil price pressure.

Underlying inflation remains subdued and longer-term inflation expectations are still below the ECB's target. QE should help reduce the risk of prolonged deflation in the eurozone through a weaker euro and a boost to confidence. But the ECB's previous easing measures, the introduction of targeted longer-term financing operations and private asset purchases, have so far had a limited impact on credit conditions and dynamics.

Downgrades would only occur if the bloc were heading into a protracted 'Japan-style' deflation, which could lead to self-reinforcing negative debt dynamics, making the downward spiral difficult to reverse. This is not our base case.

Emerging markets face increasing pressures, primarily due to the structural adjustment in China and recession in Russia and Brazil. Emerging-market growth, which peaked at 6.9% in 2010, will slow to 3.6% in 2015, before edging up to 4.2% in 2016, according to our forecasts. Lower prices of oil and other commodities and tighter US monetary policy may affect emerging-market external finances. The strong US dollar and higher US interest rates could also expose other emerging-market vulnerabilities, such as high leverage, weak policy frameworks and political fragilities, so the risks for emerging markets are increasing.

The sharp fall in the price of crude oil since last summer is spurring spending and growth in developed economies by shifting wealth to energy consumers. At the same time, persistently low crude oil prices expose oil-dependent issuers across multiple sectors to heightened risks resulting from declines in revenue and cash flow. The largest financial impact is being felt across a disparate group of energy-producing sovereigns, corporates and public finance issuers whose forecast revenue streams have been cut substantially as oil prices have fallen to around USD50 per barrel.

The Risk Radar report frames the potential impact macroeconomic risks could have on Fitch's ratings portfolio and their relative urgency. In today's interconnected markets, similar issues may have an impact on multiple asset classes. The Risk Radar provides independent and objective views on potential risks not currently incorporated in Fitch's base case analysis.

The Risk Radar is available on www.fitchratings.com or by clicking the link above.