Impact of US-Iran war to keep European credit under pressure in second half of 2026
New Delhi, June 16
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 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."
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."
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 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."
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
Reader Comments
Living in Europe, I can tell you things are tough. Higher fuel costs, inflation... it's affecting everyone. But the Indian perspective is valid - we're all interconnected. The MOU between US and Iran is welcome news. Let's hope the Strait stays open and trade normalizes. Energy costs coming down would help both European households and Indian consumers.
This war has shown how fragile the global economy is. Europe's banking sector outlook deteriorating is concerning. But I appreciate Fitch's balanced view - Portuguese and Greek banks are somewhat insulated. As an Indian, I hope this doesn't lead to a global recession. The Indian IT sector might see some dip if European companies cut spending on tech services. 😟
Interesting analysis from Fitch. The aviation and real estate sectors being hit hardest makes sense. I work in aviation and we're feeling the pinch. Higher fuel costs are brutal. But the US-Iran deal gives some hope. The Indian perspective is crucial here - India's relationship with both US and Iran means you could play a role in mediating future tensions. Your diplomacy matters!
The way I see it, this is a double-edged sword for India. On one hand, cheaper oil from Hormuz reopening helps our trade deficit. On the other, European economic weakness could hurt our exports. The banking sector outlooks are worrying - UK and German banks deteriorating. But Fitch's note about benefits to margins from higher rates is interesting. Let's hope the situation stabilizes by end of 2026. 🤞
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