The systemic crisis engulfing the eurozone and downward pressure on eurozone sovereign ratings is unlikely to diminish until European leaders articulate a credible and substantive road-map towards greater fiscal, financial and political integration, says Fitch Ratings.
In its latest bi-annual global ‘Sovereign Review and Outlook’ report, issued ahead of the EU leaders summit in Brussels on 28-29 June, the credit ratings agency (CRA) comments that the severity of the eurozone debt crisis intensified again in Q212. Weakening growth prospects, accelerating private sector capital outflows from so-called peripheral countries and elevated sovereign bond yields, plus a gathering political backlash against austerity all contributed to the uncertainty.
Fitch says that while the EU summit is unlikely to resolve the crisis, it offers an opportunity to take positive steps to stabilise the situation. Greater clarity on the path towards deeper fiscal, financial and political union between Germany and France, which appear to be on different wavelengths at the moment, would mark an important milestone towards the eventual resolution of the crisis.
The CRA adds that there has been a dramatic deterioration in Spain’s (BBB/negative outlook) credit-worthiness this year owing to the increased cost of bank recapitalisation, deeper recession, upward revisions to fiscal deficits and targets, rising projections of the public debt ratio and tightening funding conditions. Spain’s size and potential contagion to Italy (A-/negative outlook) makes it more systemically important than Greece (CCC) and more symptomatic of the fundamental design flaws in economic and monetary union.
Greece and Economic Prospects
Fitch believes that the near-term risk of a Greek exit from the euro has fallen following the victory of New Democracy in the recent second Greek parliamentary elections and the formation of a new government that is supportive of the EU-International Monetary Fund (IMF) programme. However, the economic contraction is continuing apace and the country’s liquidity position is deteriorating, underscoring the urgency of reaching agreement with the EU/IMF on the programme and a resumption of disbursements. Fiscal austerity and painful structural reform combined with a strong opposition led by Syriza means political risks remain elevated.
The CRA says that new adverse shocks centred on the eurozone are slowing the global recovery, which is creating a more difficult backdrop for sovereign credit. Fitch forecasts global gross domestic product (GDP) growth will slow from 2.7% in 2011 to just 2.2% this year, before gradually firming to 2.8% in 2013 and 3.1% in 2014. Risks are skewed to the downside, although lower oil prices could offer some respite.
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