Macroeconomic conditions in developed Europe will remain impaired by spillovers from the Iran war, even if the Strait of Hormuz reopens swiftly, says Fitch Ratings in a new report. The risk that this could affect rating trends is highlighted by the net negative balance of Outlooks across the region, particularly for sub-investment grade issuers.
Fitch’s baseline assumptions about macroeconomic conditions for 2026-2027 weakened over 1H26, largely because of spillovers from the energy price shock from the US-Iran war in 2Q26. We expect most developed European countries’ inflation to be higher and economic growth slower than our expectations at the end of 2025. Our base case assumes a gradual reopening of the Strait of Hormuz over 3Q26, but recent clashes between the US and Iran highlight the danger of more protracted disruption.
In our mid-year update of European sector and asset performance outlooks for 2026, 13 outlooks in Europe had weakened since end-2025. This included the outlook for western Europe sovereigns, which moved to ‘deteriorating’ from ‘neutral’.
The proportion of issuers in the region on Positive Outlook shrank again in 2Q26. However, the number of rating downgrades over 1H26 has not picked up markedly, despite tougher credit conditions. This partly reflects the relatively temporary nature of the energy shock under our baseline, and the role of rating buffers.
European issuers continue to face geopolitical risks beyond the US-Iran conflict. For example, security risks associated with Russia are an important rating consideration for some sovereigns in eastern Europe, and perceptions of a heightened threat from Russia and pressure from the US are pushing up European defence spending, affecting our projections for fiscal deficits and public debt trajectories.
Source: Fitch Ratings
