Moody’s Investors Service warns that stress scenarios facing the global economy for 2008-2009 are becoming increasingly plausible.

According to a new report from Moody’s, “Rarely has the global economy faced as high a level of ‘transition risk’ in recent years as it does today.”

“While the central scenario remains rather robust, the probability of a highly adverse outcome has increased somewhat, with a number of plausible stress scenarios meriting serious consideration,” it warns.

The central zone of uncertainty is the United States, where the impact of the liquidity and credit crisis on the economic outlook remains unclear, Moody’s notes.

Moody’s new report explains what the rating agency views as the baseline for the global economy in 2008-2009 as well as the key factors and developments that underpin this scenario. It then discusses what Moody’s considers to be the three possible global risk scenarios.

“In this context, it remains essential for any micro-level credit analysis to take account of the broader economic and financial context and thus to consider the credit risk implications of a decidedly less favourable outcome for the world economy,” explains Pierre Cailleteau, Moody’s chief international economist and author of the report.

Moody’s explains that the objective of this exercise is to increase the transparency of the macroeconomic and financial framework that underpins its credit opinions. These economic scenarios are intended to help Moody’s analysts formulate the outlooks for their specific markets and industries using a consistent set of assumptions that envisage various stressed economic and financial conditions. “This is not a forecasting exercise, but rather contingency planning based on plausible but unlikely scenarios,” adds Cailleteau.

The rating agency regards the global economic and financial scenario for 2008-2009 as one of continued solid growth globally, increased differentiation between advanced and emerging economies with the US facing recessionary headwinds, low to moderate global inflation, still buoyant international trade, somewhat narrowing global imbalances, a slowly subsiding stress on financial markets, with banking re-intermediation denting bank profits and weighing on credit extension, but not leading to a severe credit crunch.

“In this scenario, some financial pain continues to be absorbed, especially as the US economy confronts recessionary forces, while the engines of a globalised economy continue to fire,” Cailleteau explains.

There are many downside risks to this scenario, and a few upside risks. In fact, the degree of uncertainty around this central scenario is unusually high. Moody’s identifies three plausible stress scenarios: a sharp decoupling, stagflation and stagnation.

The sharp decoupling scenario is a variant of the baseline outlook. In this risk scenario, the dollar declines against those currency that are not pegged to it, severe inflationary pressures take hold in the emerging economies and oil prices continue to rise.

The stagflation scenario assumes the combination, in the U.S., of a recession and a significant increase in inflation, triggered in part by a sharp broad-based depreciation of the dollar in a context where the disinflationary impact of Asia’s surplus labour supply is brought to an end. This also marks the end of the current low long-term interest rate environment, the need for massive official exchange rate interventions fading away.

Finally, the stagnation scenario envisages a broad-based slowdown of the world economy and a severe risk repricing that calls into question the sustainability of much of the debt raised in recent years.