RATING AGENCIES WARN - ENERGY SHOCK WILL DESTROY ECONOMIES - Filenews 11/4 by Eleftheria Kourtali
The war has led to the biggest energy supply shock ever recorded, the rating agencies warn, and is already significantly affecting the global macroeconomic outlook, counteracting previously expected upward trends in growth. Government bond yields have risen and financial conditions have clearly tightened, increasing fiscal pressures.
If the energy price shock is prolonged or intensified, then the pressure on European fiscal policy could increase significantly. This could lead to rating downgrades of many countries, new significant market turbulence through higher interest costs and deteriorating financing conditions, while Europe may experience a technical recession in mid-2026.
At the same time, even if the war ends, the long-term effects on the economy will be many and significant. Energy markets could become structurally more fragmented, while global trade routes and supply chains would be restructured amid higher geopolitical risk premiums. Central banks will remain under pressure, while the "new normal" of higher risk and volatility premiums could force a restructuring in financial markets.
Fitch: Fiscal pressure is growing dangerously
Many Western European sovereign states were already in a vulnerable fiscal position, and the war in Iran is increasing those pressures through higher energy prices, weaker growth, tighter financing conditions and the risk of further political support measures, Fitch Ratings notes.
Since 2020, fiscal policy has faced a series of shocks: the COVID-19 pandemic in 2020-2021, the sharp increase in energy prices in 2022 following Russia's invasion of Ukraine, and the significant increase in interest expenditure largely caused by monetary tightening. In addition, Europe is facing structural, medium-term fiscal pressures from the green transition, rising age-related spending in most countries, and commitments to higher defense spending, the agency emphasizes.
As a result, budget deficits were persistently high before the shock of the war. In 2025, they exceeded 3% of GDP in most Western European countries, while the average Eurozone deficit was also 3%. Belgium, France and the United Kingdom had the largest deficits in the region, over 5% of GDP, and Germany's is expanding. The European Fiscal Council, in its latest assessment, expressed concerns about the implementation of the EU's reformed fiscal rules.
At the same time, as Fitch points out, debt levels in EU countries are also high: it exceeds 100% of GDP in Belgium, France, Greece, Italy, Spain and the United Kingdom. In France and the United Kingdom, the debt ratio was higher at the end of 2025 than in mid-2022. This leaves limited fiscal space to mitigate the negative effects of the new energy price shock for countries with already large deficits and high debt.
At the same time, weaker economic growth due to higher energy prices, a negative shock to trade conditions for most EU members or trade disruptions in a more severe scenario will lead to wider budget deficits, Fitch warns. Beyond the standard transmission channels for income and expenditure, households significantly increased their savings in 2022-2023. This could be repeated due to high geopolitical uncertainties.
Although low inflation and strong monetary policy credibility have helped keep eurozone yields relatively low compared to other developed markets, Germany's 10-year bond yield has risen to 3%, up 30 basis points since late February and the highest levels since 2010. Long-term inflation expectations in the Eurozone rose by about 50 basis points in March, suggesting that what may be a temporary shock to energy prices has already affected financial markets' long-term expectations.
As Fitch warns, if the energy price shock is prolonged or intensified, then the pressure on European fiscal policy could increase significantly. This could lead to downgrades of the rating of many countries, especially for those states where the real economic cost of the shock is projected to be high. These negative effects could be amplified by market tensions, through higher interest costs and deteriorating financing conditions.
S&P: Growth has already been hit significantly – Risk of a technical recession in Europe
The war in the Middle East is significantly affecting the global macroeconomic outlook, effectively counteracting previously expected upward trends in growth, the rating agency S&P warns. Before the start of the war at the end of February, the agency was ready to raise its forecasts for GDP growth in 2026 by between 0.25 and 0.50 percentage points for a wide range of countries. This was based on strong results until 2025, which created a positive carryover. In addition, there has been the tailwind from the development of artificial intelligence and data centers, favourable economic conditions, a fiscal boost in some major economies, and low energy prices. Of all these positives, only the first one remains, S&P points out. These upward revisions in growth have now largely been ruled out and risks have shifted to the downside.
The war has led to the biggest energy supply shock ever recorded. The closure of the Strait of Hormuz effectively trapped about 15%-20% of the world's oil and gas reserves, or about 15 million barrels per day. Most of this fuel is destined for East and South Asia. Partial relief has been found through two regional pipelines bypassing the Straits and through the release of global reserves coordinated by the International Energy Agency. However, a significant deficit remains.
The crisis has entered the phase of supply shortages, S&P points out. Supply constraints have begun to be binding. Producers or those who have stocks become critical.
The affected economies have already introduced rationing, export bans and public awareness campaigns. Local oil and gas prices diverge from global benchmarks as natural delivery becomes the primary target.
Energy prices are at the heart of the market, given the supply shock in the Middle East. Traditional benchmark prices of U.S. WTI crude oil and Brent crude have risen by 50%-55% since the end of February, exceeding $100 per barrel, while volatility has increased and is driven by news that changes daily.
At the same time, as S&P notes, long-term government bond yields have increased since the start of the war. This suggests rising inflation expectations over the coming year. For advanced economies, the average increase in 10-year bond yields was nearly 50 basis points. The increase in emerging market spreads was higher on average, but with a wide variation. Corresponding mortgage rates have also increased, albeit moderately. Markets have also seen borrowing spreads increase.
Financial conditions have clearly tightened over the past month, the agency emphasizes. This reflects the combination of higher energy prices (lower disposable income), lower stock prices (less wealth), and higher benchmark interest rates and spreads (higher borrowing costs). Empirically, these signs suggest downward pressure on GDP growth in the coming quarters, he warns.
Especially with regard to Europe, S&P notes that the war has disrupted the recovery, pushing inflation upwards, affecting growth prospects and complicating monetary policy. He expects the ECB and the Bank of England to raise interest rates as early as the second quarter of 2026. Germany's rapid fiscal stimulus, positive investment momentum, and ongoing digital transformation – alongside the subdued impact of a strengthened defense effort – continue to benefit Europe's economy. Recent U.S. tariff adjustments offer a temporary relief.
But if the oil price shock turns out to be more severe and longer lasting than the agency's current baseline scenario, which envisages an end to the conflict in April, inflation could exceed 5% in May/June, plunging the economy into a technical recession in the middle of the year. In this scenario, he expects the ECB and BoE to raise interest rates once again in 2026.
Moody's: Even if the war ends, the economy will continue to be brought to its knees
Since the US and Israeli attacks on Iran began on February 28, oil and gas prices have fluctuated sharply as markets constantly reassess how long the conflict will last and how much it will spread, Moody's Analytics points out. But an equally important question is what will happen after the missiles and drones stop flying – when the conflict stops and the headlines fade, but businesses, policymakers and investors are left with a new risk map.
As the agency warns, even if the fighting stops tomorrow, the conflict is likely to leave behind structural changes in the global economy in a number of factors. These are slow changes, but they are likely to matter more to medium-term growth and inflation than the volatile price of Brent on any given day.
It was already clear that the Strait of Hormuz is not just another shipping route. They have long been recognized as a choke point for global energy trade, with about a quarter of marine oil passing through it in normal times. Their effective shutdown has driven energy prices higher, but, even if they reopen after the conflict, energy buyers and governments will shift to focusing on resilience, not just lower costs.
This will be especially important if the conflict stops but Iran remains as a regional competitor. If the current regime persists, then the risk of future disruption will remain high, due to new potential direct conflict, activity through agents or even simply increased insurance premiums, the agency emphasizes.
The economic impact of this will be an increase in the fragmentation of energy markets, with regional standards diverging and different buyers relying on their "reliable" routes. Ultimately, this will lead to a larger divergence in oil prices, in line with a less substantial global market.
There is a second clear consequence of fragmented markets, Moody's emphasizes: The need for alternative energy sources and domestic resilience will be strengthened. One challenge is that this is likely to require significant investment from the public sector in most economies.
At the same time, central banks will remain under pressure as inflation and growth diverge, with fiscal policymakers also facing difficult offsets.
With defense budgets already in the spotlight, given NATO's commitment to increase spending, many countries in and around the Middle East are likely to follow suit even after the current conflict ends, as Moody's points out. Iran's willingness to strike infrastructure in neighbouring countries only increases this imperative.
At the same time, moves to support energy independence are likely to weigh on public balance sheets, and these demands for higher defense and energy spending will be difficult for economies with limited fiscal space.
A final channel is finance, as Moody's notes. The stock and bond markets have recorded sell-offs as the conflict has dragged on, but not too intense. Higher global risk, due to heightened geopolitical uncertainty and the likelihood of a resurgence, should be reflected in higher risk premia. However, the oft-cited gap between geopolitical risk metrics and market volatility remains quite high.
Markets can deviate from economic fundamentals for a very long time, and in the past geopolitical risk has weakened after initial peaks, the agency points out. But, once the dust settles, investors will reassess the risks in their portfolios, leading to a significant repricing of some assets, which for some markets can be sudden and painful.
Overall, Moody's concludes, these channels suggest that the long-term economic impact of the current conflict could be significant, even if it is resolved soon. It is unlikely to leave a mark on the economies of the Middle East alone. Instead, it will accelerate pre-existing trends and pose new risks to economic stability.
