Coface downgrades US and puts Japan on negative watch

Ratings agency Coface has downgraded the US rating to A2, after a year of being watch-listed with negative outlook. The downgrade is a reaction to Coface's assessment of what it sees as deteriorating payment behaviour of American companies in January and February 2008. With it getting more difficult to access credit, firms that rely on domestic consumption are feeling the worst effects of the credit crunch.

Coface predicts American growth will continue to be weak or even negative in the first half of 2008, but should see a slight upturn in the second half of the year. This small recovery will be in part provoked by economic policy and the continuing demand in emerging countries which represents more than 50% of the country's trading outlets.

The ratings agency has also downgraded neighbouring Canada and Mexico. The countries remain rated as A1 and A3 respectively, but both have now been given a negative outlook.

In particular, Canada’s manufacturing industry is seeing an increased risk of payment defaults, as a result of the rising Canadian dollar and the slowdown in the US.

Mexico is also suffering from the ill-effects of a US downturn, with the country’s export industry heavily reliant on US demand. Household consumption in Mexico is also reported to be facing problems.

With the crunch spreading into markets beyond the US, Coface has now watch-listed Japan with negative outlook. In the meantime it retains its A1 rating.

Coface watch-listed Japan due to the country’s slowing level of exports caused by a fall in US demand, as well as a strong Yen which is impeding companies "price competitiveness.
Food prices and regular salary reductions are reducing household consumption, and bankruptcies are on the up, increasing by 18% in 2007 and affecting companies in the construction, distribution and service sector, as well as among the small and medium-sized manufacturing companies.

Coface’s chief economist, Yves Zlotowski, comments: "These companies have got their backs to the wall. They are often dependent on a single client, and as such were already suffering from pressure on their margins prior to the current rise in the prices of their inputs, the lively competition now offered by the Chinese sub-contractors and the flat internal demand”.