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Europe

Solution to eurozone crisis 'beyond reach', Fitch says

Text by News Wires

Latest update : 2011-12-16

Fitch Ratings warned on Friday that it will consider downgrading seven eurozone countries including France, saying a solution to Europe's debt crisis appears to be "technically and politically beyond reach".

REUTERS - Fitch Ratings on Friday warned it may downgrade France and six other euro zone countries as it believes that a comprehensive solution to the region's debt crisis is "technically and politically beyond reach."

France's possible downgrade is not imminent but could come in two years, Fitch said in a statement, as it revised the outlook of the country's AAA rating to negative.

For the other countries -- Belgium, Cyprus, Ireland, Italy, Slovenia and Spain -- a downgrade could come much sooner. Those nations, which already had a negative rating outlook from Fitch, were placed on credit watch negative, which traditionally signals the possibility of a downgrade within three months at most.

"The systemic nature of the euro zone crisis is having a profoundly adverse effect on economic and financial stability across the region," Fitch said in.

The agency's comments also increased pressure on the European Central Bank to take on a larger role in the solution of the crisis.

"Of particular concern is the absence of a credible financial backstop," Fitch said. "This requires more active and explicit commitment from the ECB to mitigate the risk of self-fulfilling liquidity crises for potentially illiquid but solvent euro area member states."

Fitch's warning, which comes as investors fear an imminent downgrade of France, Germany and several other euro zone countries by rival Standard & Poor's, dragged U.S. stocks and the euro lower.

The Dow Jones industrial average and the S&P 500 index slipped into negative territory just after Fitch put the six euro zone nations on credit watch negative. They were trading near the unchanged mark since then.

The euro, which was already falling against the U.S. dollar, lurched below $1.30 after the first headlines from Fitch, dropping from $1.3018 to a session low $1.2994 before recovering some ground.

France’s finances

Fitch's main concern for France is that a worsening European crisis may impose a heavy burden on government finances through rising contingent liabilities. France, the ratings agency warned earlier this month, has no more fiscal space to absorb further adverse shocks undermining its AAA status.

"Relative to other AAA euro area member states France is, in Fitch's judgement, the most exposed to a further intensification of the crisis," Fitch said.

It warned the worsening of the crisis since July constitutes a significant negative shock to France's economy and the stability of its financial sector.

Economists took Fitch's message as a clear sign that the French government must further tighten its belt.

"Fitch will watch with interest whether the French public debt ratio falls starting in 2013 -- and for that we know that the deficit has to be less than 3 percent of GDP," said Societe Generale's chief economist for France Michel Martinez.

"The risks are obvious (to France's rating). The risks are that the debt crisis situation could get worse," he added.
 

Date created : 2011-12-16

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