Fitch Ratings said Thursday that although its main view remains that the eurozone will survive the region’s sovereign debt crisis intact, the risk of alternative outcomes is rising, with a Greek eurozone exit the most likely of those alternative scenarios.
If that happened, Fitch said in a report, all eurozone sovereign ratings would be placed on watch for downgrade, with Cyprus, Ireland, Italy, Portugal, and Spain most likely to be downgraded. Greece would probably have to re-denominate its debt and default again. The outcome in terms of downgrades of other eurozone countries would depend on the level of contagion originating from Greece’s exit from the euro.
But even in its relatively benign “muddle through” base case, Fitch ratings believes some further eurozone sovereign rating downgrades are likely. The majority of eurozone sovereigns are on negative outlook, reflecting the economic cost of the crisis and rising political tensions that may hinder the implementation of effective policies.
Fitch said that the present crisis has shown that the European Monetary Union is substantially flawed and fundamental reforms are needed to turn it into a viable structure for the long term.
Additional measures are still needed to resolve the crisis, although the fiscal compact, fiscal austerity measures from individual countries, structural reform programmes and financial assistance to peripheral countries are steps forward in the right direction.
Fitch said those fundamental measures are likely to entail more integration of eurozone fiscal policies and economic governance, including some dilution of national fiscal sovereignty, potentially some partial mutualization of sovereign liabilities and resources, as well as strengthened common financial supervision and stronger reforms on common economic governance.
But Fitch added a move towards a full fiscal union is also very unlikely, as there is no political will for it. However, a full break-up and demise of the euro remains the most unlikely alternative scenario given the huge economic, financial and political costs of such an outcome.
Greeks go to the polls on Sunday with the two main parties, the center-right New Democracy and socialist PASOK, expected to fare badly and fringe parties on the left and right likely to make gains. The election comes with Greece in its fifth year of recession, with unemployment at 21 percent, and as the government undertakes deep austerity measures as a condition of the country΄s European Union and International Monetary Fund bail-outs.
(source: Dow Jones)
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