Why Is Fitch Asking Investors To Stay Away From European High-Yield Debt

Fitch Ratings recently released a report, which asks investors to stay away from European high-yield debt. Ed Eyerman, managing director at Fitch Ratings, was on CNBC explain the reasons behind that warning.

Exports Will Bring Large Surpluses

"We are getting more consumption in the U.K., and people are borrowing money and they are buying things that may not be productive," Eyerman said. "And one of the sectors where money was actually being spent on real investments was the oil and gas sector, and that's been declining dramatically."

He continued, "So, as everyone gets excited about a lower euro, lower energy prices and the ECB, the export story in continental Europe is certainly likely to carry on. But, with that come very large surpluses that we saw in 2007."

Extra Imbalances Have To Be Met By Domestic Imbalances

He elaborated, "So, in 2007, the surpluses were absorbed by the periphery where there was a consumption boom and lots of fixed asset investment in unproductive sectors. So, as we get large surpluses, those are extra oil imbalances that have to be met by domestic imbalances or deficits in the importing countries such as the U.K. and the U.S."

Related Link: Greek Drama Still Threatening Europe's Stability

Growth Will Come From Unproductive Consumption

"I would just finish by saying that the extra oil imbalances produce internal imbalances insofar as: more the export sectors do well than the importing sector, the export sector in the U.K. and U.S. will do poorly and so any growth that we get is likely to come from more credit fueled growth in fixed assets and potentially unproductive consumption," Eyerman concluded.