US-Iran war's end may shift Europe's credit outlook: Fitch Ratings

Fitch Ratings' mid-year update says the US-Iran war has hurt European credit. An MoU ending the war may ease pressure on households and airlines, but inflation and high rates will persist, with banking asset quality risks remaining.

European credit conditions are set to face more headwinds through end-2026 as the US-Iran war dragged on growth, lifted inflation and raised funding costs, but the outlook may now shift quickly, as per Fitch Ratings' mid-year update. The US and Iran signed an MoU on June 16, paving the way for the Strait of Hormuz to fully reopen after 108 days of war.

If energy costs fall and trade routes normalize, pressure on households, airlines and homebuilders could ease faster than Fitch projected. Still, inflation and higher rates will linger. Banking margins should hold up, but asset quality risks remain until confidence returns.

Fitch's Mid-Year Projections

Fitch Ratings' research and projections were based on conditions before the US and Iran reached an agreement to end the war and open the Strait of Hormuz. According to Fitch Ratings, "The adverse effect of the US-Iran war on European economic growth, prices and funding costs will weigh on credit conditions for several sectors across the continent."

In its mid-year update, Fitch said, "13 outlooks in Europe had weakened since end-2025."

Sovereign Outlooks Weaken

Western Europe sovereigns were downgraded to 'deteriorating' from 'neutral'. Fitch stated this "reflects our expectation that the war will weaken GDP growth, raise inflation and increase pressure on public finances." Eastern European sovereigns have been 'deteriorating' since mid-2025. The conflict adds to challenges there but is "not a key factor."

European Banking Sector Outlooks

The UK and German banking sector outlooks moved to 'deteriorating' from 'neutral'. The Spanish banking sector moved to 'neutral' from 'improving'. The French banking sector outlook remains 'deteriorating'. Fitch noted "The outlook for western European banking sectors as a whole remains 'neutral', reflecting expected resilience in a weaker growth environment and benefits to margins from interest rates being higher than we had expected." Portuguese and Greek banking sectors, which are "fairly insulated from Iran war risks", remain 'improving'.

For the UK, Fitch cited "Weaker and uncertain prospects for business growth in 2H26, higher pressure on asset quality and increasing market risk."

Germany's revision reflects "a less pronounced lift to growth from the country's fiscal package, limiting business volumes." The conflict also added risks through "higher energy prices and weaker external demand."

Aviation, Real Estate Among Hardest Hit

Aviation and real estate were hit hardest. Fitch revised global sector outlooks for airlines and airports to 'deteriorating' due to "war-related disruption, demand destruction and cost increases, with European aviation being significantly affected."

The outlook for global aircraft lessors, many based in Europe, also moved to 'deteriorating' on "geopolitical headwinds arising from the conflict and the potential effect of higher fuel costs." EMEA homebuilders moved to 'deteriorating' as "sales volumes remain subdued due to weaker consumer confidence and mortgage rates staying higher for longer, and the war has pushed up construction costs."

Strain on Structured Finance

Structured finance felt the strain too. Asset performance outlooks for non-industrial CMBS and auto, credit card and unsecured loan ABS were revised to 'deteriorating'. Fitch said the Iran war was "important for CMBS, where its impact in tightening refinancing conditions and weakening consumer spending and tourism has played a role."

(ANI)

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