The study, which looks in depth at the growing European-rated universe of companies and utilities, tracked a general deterioration in debt protection measures in 2001. The rate of downgrades to upgrades was the highest since the early 1990s, while defaults were also at a record level, albeit relatively small in number compared with those found worldwide.

Since this study was first undertaken in 1999, S&P has been projecting an increasing rate of defaults among European issuers, and ultimately a convergence between global and European default levels, observed S&P (credit market services) managing director and chief credit officer for Europe Barbara Ridpath. The figures are slowly, but inexorably supporting that projection.

To date, defaults have mirrored the increase in speculative-grade ratings, after a three-year lag. Speculative-grade ratings peaked at 39 per cent in 1999 and have since fallen back to 33 per cent. While the proportion of speculative-grade debt to total debt in Europe has stabilised, it is expected that this will move into line with the global data in the longer term. As a result, the share of speculative-grade debt could rise to about 40 per cent from 20 per cent at present, depending on the strength of the European economy.

With debt and equity investors increasingly comparing companies across boundaries when assessing investment opportunities, European companies are under pressure to structure themselves as aggressively as their US peers. Consequently, as the economy improves and investors become less risk averse, the proportion of speculative-grade issuers in Europe could well rise higher than the rest of the world, due to a combination of more speculative-grade debt issues in Western Europe and the entry of more issuers from the emerging markets, notes Ridpath.

While overall credit quality declined in Europe in 2001, ratings penetration continued to rise (up 9.6 per cent on last year). Furthermore, this growth is expected to be maintained due to the emergence of the euro as a reserve currency, increased access by companies within the EU accession member countries, and further bank disintermediation.