Growth will slow moderately in 2007 with exports affected by less favourable exchange rates and less buoyant demand from the United States. Household spending will continue to grow at a good rate, however, thanks to an improving job market, lower taxes (except in Germany and, to a lesser extent, Italy), and a positive contribution from immigration in several countries. Continued monetary tightening should have little impact except on a weaker residential property market affected by the high level of prices and household debt in many countries.

Companies will invest more to ease the pressure on production capacity with their good financial health making it easier to obtain bank financing where necessary. Public sector investment, meanwhile, will remain limited by the need to restore or maintain public financial equilibrium, which will delay infrastructure projects and research programmes intended to increase productivity.

Beyond those general observations along with euro zone membership status or lack thereof, economic growth will continue to vary by country. While remaining high in Spain, Greece, Ireland and Scandinavia, it will remain lacklustre in Italy and Portugal amid sluggish consumption and a lack of export competitiveness. Growth will be moderate in the other countries, including France and the United Kingdom, buoyed by robust domestic demand, except for Germany where exports will continue to drive the economy.

Overall, the economic slowdown will only moderately affect corporate payments and solvency with all countries rated A1 except for Italy, Portugal, and Greece, rated A2.

Some economic sectors will present significant levels of risk with three sectors downgraded Coface accords sector ratings on a global and regional basis. Ratings mentioned here are for Western Europe. and only one upgraded.

· The textile and clothing sectors (rated C-) are still suffering from fierce competition from low-cost labour countries, particularly Asian.

· Innovative sectors, like the IT industry (rated B-), telecommunication equipment (rating downgraded to B+), consumer electronics, and home appliances have been contending with a downward price trend and short product life cycles. Production and to an even greater extent, distribution present an increasing level of risk.

· The car industry (rating downgraded to B-) will continue to face stagnant demand with subcontractors affected by the difficulties experienced by several carmakers saddled with slow-selling models and looking for cost savings.

· Construction (rating downgraded to B+) should remain shaky due to the large number of recently created small- and medium-size companies operating in the sector and to a loss of dynamism in several countries.

· Paper (rated B+) should continue the restructuring process underway, notably through capacity reductions, and consolidate the improvement in risk quality.

· Air transport (rated B) should consolidate its recovery thanks to the levelling off of energy prices and to high load factors, which will not preclude further difficulties for some companies.

· At a lower level of risk, intermediate industries like chemicals (rated A-) and steel (rated°A) should maintain a good risk profile with the levelling off of energy and raw material prices offsetting slightly weaker demand.

· In the same manner, mechanical engineering (rated A-) should continue to benefit from the good rate of investment not only in emerging regions but also in the domestic market.

· Mass distribution, whether generalist or food-focused (rating upgraded to A-), will benefit from continued satisfactory consumption growth. The situation in Germany and the Netherlands should even improve further with the withdrawal of certain actors.

Central Europe and Turkey:

1 – Growth will remain buoyant in 2007, except in Hungary

Buoyed by robust domestic demand and good export performance, growth accelerated in many Central European countries in 2006, reaching 5.7% on average, a rate three percentage points higher than the growth posted by the Europe of 15. The financial turbulence that buffeted Turkey in spring 2006 caused only a moderate slowdown (5.2%).

Regional growth should remain high in 2007 although a slight slowdown is likely with average growth easing to 5.1% due to a loss of dynamism in the euro zone — the region's main trading partner - rising domestic interest rates, and, in the particular case of Hungary, implementation of an austerity budget plan. Consumption should generally continue to benefit from the growth of real wages, improvement in the job market, and the expansion of credit. Investment growth, meanwhile, will remain underpinned by foreign direct investment and European Union transfers. The productivity gains partially offsetting exchange rate appreciation will spur development of sales abroad. With the continued growth of imports, however, the foreign trade contribution to economic growth should remain low.

Estonia and Latvia will keep the trophy for dynamism (8%), with Slovakia, and Romania registering growth slightly above 6%, Turkey, Poland, and the Czech Republic about 5%. In Hungary, however, GDP growth should slip to 2.6%.

2 – With shaky public finances, many new EU member countries have had to put off adopting the single currency.

Central European countries have been running a public sector deficit representing, on average, about 3.5% of GDP. With the exception of the Baltic countries, Bulgaria, and Turkey, as well as Slovenia (scheduled to join the euro zone in January 2007), the deficits have been remained relatively high. Hungary has suffered the most severe case of slippage with its fiscal imbalance reaching 10% of GDP in 2006. Despite improvement expected in 2007, its public sector debt will continue to grow (70% of GDP). Among new European Union members and the region's major countries, only Slovakia, already part of the European Union's ERM2 exchange-rate mechanism, appears ready to adopt the euro in a reasonable timeframe (2009), with that prospect receding into the future for the region's other leading economies, particularly Hungary.

3 – Compounding public financial difficulties, growing external deficits have increased the vulnerability to exchange rate crises.

Emerging Europe has notably been running large current account deficits attributable to domestic demand dynamism and low domestic saving rates. Its external financing needs are currently the highest of any emerging region with Turkey's needs, estimated at around 60°billion dollars, representing the lion's share. Emerging Europe has thus become the region most dependent on international financial markets. Although current account deficits have remained limited to under 3% of GDP in Poland and the Czech Republic, they have reached high levels (between 6% and 9%) in Slovakia, Turkey, and Hungary, peaking at levels between 9% and 14% in Romania, Bulgaria, and the Baltic States. Risks linked to that deterioration often seem under control in the short term thanks to a relatively high influx of foreign direct investment covering nearly 40% of the region's external financing needs on average. That statistic masks notable disparities, however, with the coverage rate high in the Czech Republic and Bulgaria and very low in the Baltic States and Hungary. With privatisation programmes moreover drawing to a close, continuing development of greenfield investment will be necessary.

Those flows have not prevented foreign debt from growing, particularly privately held debt (banks and companies), while continued large public financing needs have also pushed government foreign debt higher in some countries. In that context, the debt burden in relation to GDP has reached high levels in Hungary, Croatia, and the Baltic countries. The debt service ratio has remained high in Turkey.

Foreign exchange markets have recovered in Turkey and Hungary, the country most affected by the turbulence of May/June 2006, thanks to a pause in the monetary tightening cycle in the United States and increases in domestic key rates. However, the regional situation is still precarious particularly in those two countries. The spectre of a currency crisis could thus resurface in case of failure to meet fiscal objectives or continued worsening of current account deficits, especially if the political environment should deteriorate. With the now significant risk of government instability in Hungary and Turkey, heightened tensions could mark 2007 in the run-up to presidential and legislative elections.

A major collapse would weaken part of the private sector, especially with an increasing proportion of bank loans denominated in foreign currencies.

4 – Moderate but relatively volatile payment incident frequency

The high growth has fostered improvement in the solvency of Central European companies. Their payment behaviour has also improved overall although remaining more volatile over time than that of the generally more solid companies of Western Europe. Although the legal framework has improved concomitantly with the European Union admission process, shortcomings have persisted, particularly in the Balkans.

That favourable trend nonetheless does not exclude occasional isolated payment failures in weaker or highly competitive sectors in those economies. The electrical-electronic sector, the car industry, and telecommunications seem solid. In Turkey, the domestic appliance and chemical sectors have, furthermore, been very dynamic. Conversely, the independent retail, food, and textile sectors have been contending with a much deteriorated environment.

5 - Regional @rating trend

Regional countries generally represent good risks. The major economies, except Turkey, rated B, have earned ratings ranging from A2 to A4. The risk of the environment deteriorating in those countries and triggering large numbers of payment defaults has remained moderate. The situation of particular companies will depend more on their economic sector.

Greater vulnerability to currency risk has, however, prompted a downgrade of Hungary's rating to A3 and removal of Turkey's B rating from positive watchlist status. Elsewhere, the risks have generally stabilised after the improvement registered in recent years in the context of European Union accession. That pause reflects the tense regional public financial situation and a loss of appetite for reforms on a background of growing populism and euroscepticism. The tendency towards populism has particularly affected Poland and Slovakia, with the conservatives of the Polish rightwing Law and Justice Party and the socialist Slovakian Smer Party concluding coalition agreements with nationalist and populist parties. Although those two political currents have no representation themselves in Hungary or the Czech Republic, rightwing parties in the government and parliament have acted as a conduit for their ideas in both countries. In the Romanian parliament, a large nationalist movement has been sitting on opposition benches.

With a rating upgrade to A1, Slovenia, unlike many other new member countries, has been able to proceed with adoption of the single currency without delay. The Czech Republic, benefiting from the highest influx of direct investment in the region and limited foreign debt, has retained its A2 rating. More dependent on foreign debt, Poland and Slovakia are still rated A3. With Bulgaria pursuing tight economic policy and scheduled to join the European Union in January 2007, its rating has been upgraded from B to A4. Also part of the new enlargement wave, Romania, with a high current account deficit and notable governance deficiencies like Bulgaria, has retained the A4 rating it acquired last year.

Ratings of the main regional economies