The euro zone risks resembling a developing-world economy within a generation, if policymakers there fail to reform over-stretched welfare systems, Standard & Poor's has warned.
The ratings agency estimated that more than half of European countries would receive junk ratings by 2050. All of the continent's sovereign debt would be shorn of AAA ratings by 2030, with no country holding even a AA rating a decade later.
The sharp warning came on another day of grim news emerging from the euro zone, as governments struggle to get to grips with debt turmoil that threatens to break apart the single currency at the heart of the continent.
Private-sector activity suffered its worst monthly slide this month in nearly three years, new data showed. In the coming years, however, the euro zone faced a potentially growing headache caused by an ageing population, S&P said.
"This shows the magnitude of the problem," said Kai Stukenbrock, the senior director of sovereign and international public finance ratings at S&P in Dubai. "On top of what we currently see, there's also some long-term pressure for the euro zone caused by ageing societies [and] pensions systems under stress."
Ratings would sink as the share of the working-age population relative to pensioners fell, squeezing pension systems and heaping pressure on public finances, he said. Only policy change could stop the scenario.
Governments have already been warned about the risks of the so-called greying Europe. The continent's median age is forecast to rise from its 2003 mark of 37.7 years to 52.3 years by 2050, according to analysts at the Washington-based think tank the Brookings Institution. Under such a scenario, the continent's economic output would drop sharply during the next four decades.
Analysts have also questioned how already squeezed public finances will pay for the projected jump in welfare spending.
"With the sheer size of the welfare state, it's quite obvious that the sustainability of the cradle-to-the-grave approach is unsustainable," said Mark McFarland, the chief investment strategist at Emirates NBD. "With rising populations, labour markets are also too tight, so it's difficult to hire and fire."
Governments' ability to raise cash is heavily dependent on their sovereign credit ratings. Debt issued by a "junk rated" country usually offers interest rates at least three to four percentage points above safer government issues.
The fiscal crisis in the euro zone means S&P's ratings have already begun to slide from their peak in 2004. Within the euro zone, only Germany, the Netherlands, Luxembourg and Finland have AAA ratings from S&P at present.
Greece, which is at the centre of the euro-zone crisis, has one of the lowest global ratings - CCC.
But developing-world economies in South America and the Caribbean are generally the poorest-rated.
In a sign that even Germany's powerhouse economy is starting to feel the strain of the crisis, German bond yields have fallen to record lows. The country's business sentiment fell this month and the manufacturing sector also dipped during the month, data released yesterday showed.
The euro zone's "Teflon economy" has begun to show signs of weakness as concern builds about Greece's future in the single currency.
"Our main base scenario is that Greece will stay in the euro zone and the euro zone will someway manage, step by step, to get through the crisis," said Mr Stukenbrock. "We are well aware there is a scenario where the euro zone survives but one, two or three will not be members any more."
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