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S&P Global Ratings: European potential downgrades record highest yearly increase

Europe has faced the highest yearly increase in potential bond downgrades compared to other regions, a substantial rise to 149 issuers from 42, as low interest rates continue to hinder German bank profitability amid a manufacturing slump, said S&P Global Ratings in a report.

S&P Global Ratings' total number of European potential bond downgrades rose to 605 in October from 595 in September, higher than the 12-month average of 560.

The downgrades include issuers rated AAA to B- with either negative rating outlooks or ratings on credit watch with negative implications.

The largest increase in potential bond downgrades were in German and Italian financial institutions, with Germany leading the number with six followed by Italy with five.

Germany's low interest rates continue to obstruct banks' net interest margins and income, while weakening global demand limits manufacturing and corporate demand for credit continues to fall. Meanwhile, geopolitical risks in Italy have hampered foreign and domestic demand.

The auto sector has seen the biggest negative bias with the largest increase in potential bond downgrades in Europe over the past year, a total of five, either from Germany or France. Namely, S&P Global Ratings considers Renault SA, IHO Verwaltungs GmbH and ZF Friedrichshafen AG to be vulnerable to being downgraded to speculative grade from investment grade.

Moreover, S&P Global Ratings considers the eurozone's current economic weakness to endure in 2020 as the manufacturing slump and the global economic slowdown begin to take effect despite strong household consumption supported by resilient labor markets and dynamic wage growth.