PARIS, Sept 20 – Credit ratings agency Fitch said on Tuesday that the eurozone was unlikely to break up despite the recent escalation of the debt crisis, and that steps towards a solution were already being taken.
“Concerns over the risk of a break-up of the eurozone are hugely exaggerated,” said David Riley, Fitch’s head of global sovereign ratings.
“Fitch’s ratings continue to be underpinned by the fact that it is a case of ‘no going back’ for the Eurozone and its member states and it remains confident that the European Central Bank will continue to intervene to ensure that a market-induced liquidity crisis does not become an unnecessary and ‘accidental’ sovereign default event,” he said.
If Greece or any other country in difficulty were to leave the eurozone it would not only be economically “irrational,” but if it occured with the encouragement and acceptance of other member states it would set an “unhappy precedent,” the agency said.
“The commitment to the euro, far from being irrevocable, could be reversed, a process that would fatally undermine the credibility of the commitment of other member states.”
Fitch also ruled out the idea of a full fiscal and political union as a solution to the crisis, saying the public support and political will for such a move did not exist.
The agency suggested a “third way” to secure the long-term viability of the euro including the establishment of a pan-European supervisory and regulatory structure for financial institutions.
The agency advocated “greater European oversight and coordination of domestic economic and fiscal policies with the ultimate sanction of an ‘orderly’ sovereign debt restructuring mechanism to ensure discipline on governments and lenders.”
Riley said: “To this end, Fitch believes the proposed European Stabilisation Mechanism (ESM) and the introduction of collective action clauses in government debt issued from mid-2013 is a significant step in this direction.
“However, reform to the governance of the euro area is politically and technically complex and will take considerable time to put in place and to earn the trust of investors and acceptance of the public.
“In the meantime, the ECB has little choice but to continue to absorb more and more sovereign and bank risk on its balance sheet until and unless the EFSF is enlarged and made more operationally flexible, including potentially allowing it to borrow from the ECB as well as giving it greater operational independence.”