A disorderly Greek default would likely result in severe market volatility, pressures on sovereign and bank funding and a broader re-pricing of euro zone sovereign credit. The risk of contagion to other distressed and vulnerable euro zone sovereigns and their banking systems is material. Resolution of the current Greek crisis is therefore essential - though not sufficient - to prevent a systemic threat to the euro zone.

Outside the euro zone, the US is risking its own governance and sovereign debt crisis through its brinkmanship over lifting its statutory government debt ceiling. As Fitch has stated previously, the agency believes agreement will ultimately be reached and the US government will make full and timely payments on its debt. Nonetheless, failure to act in a timely manner could imperil the US 'AAA' status. Default by the world's largest borrower and issuer of the pre-eminent reserve currency would be extraordinary and threaten the still fragile financial stability in the US and the world as a whole, especially against the backdrop of the euro area sovereign debt crisis.

So-called 'advanced' countries also appear to be approaching the limits of their capacity for further expansionary economic policy as the US, Japan and the UK still face a formidable challenge to reduce large budget deficits and stabilise high and rising public debt ratios in an environment of high levels of private sector debt and weak growth. Ultimately, even countries with strong monetary sovereignty face an inter-temporal budget constraint, and failure to stabilise public finances would put downward pressure on ratings over the medium-term.

Against this backdrop, weak Q111 GDP growth outturns in several major economies and global manufacturing indicators have highlighted the fragility of the global economic recovery. However, with much of the slowdown attributable to temporary factors - namely the impact of higher oil prices and the Japanese natural disasters of March 2011 - Fitch's view is that the global economic recovery remains on track, albeit at an uneven pace from quarter to quarter, and from country to country.

In contrast to the challenges facing advanced economies, emerging markets (EMs) are growing strongly and ratings dynamics remain positive. Fitch forecasts EMs to grow 5.7% in 2011 and 2012, down from 6.8% in 2010, but well above growth forecast for major advanced economies (MAEs) of 1.9% in 2011 and 2.3% in 2012. Furthermore, in aggregate, EMs have moderate and declining budget deficits, relatively low government debt ratios and are continuing to accumulate large stocks of foreign reserves. This provides a supportive backdrop for EM creditworthiness. Fitch upgraded nine sovereigns in H111, relative to four downgrades - all in the Middle East and North Africa, related to political unrest. Moreover, there are 17 EMs with ratings on Positive Outlook compared with just eight on Negative Outlook or Rating Watch Negative, suggesting further upward momentum.

Nevertheless, sustaining robust growth requires re-orientating growth away from exports to sluggish MAEs and towards domestic demand, as well as reforms to ease infrastructure and supply-side bottlenecks and timely policy action to forestall overheating. Exceptionally loose monetary policy in MAEs has fuelled strong capital inflows in some large EMs, providing policymakers with a challenge of preventing inflation, excessive exchange rate appreciation and potential threats to macro-financial stability. Loose global monetary policy has also stoked commodity prices, which have increased inflation and (in some countries) fiscal and political pressures. As the Arab Spring has underlined, potential political shocks remain an important risk factor in a number of EMs.

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