Business World

Thursday 23 November 2017

Fitch: More ECB buying, EU aid needed to stem contagion

Fitch Ratings said the European Central Bank’s bond purchases may need to be increased and Europe’s rescue fund expanded to stem contagion from the sovereign-debt crisis.

The region’s debt crisis has “escalated beyond the point that it can be contained” by individual bailouts, the company said in a report today in London.

Additional steps that may be needed include “a substantial increase in the volume of ECB purchases of government debt under its Securities Market Program, an increase in the financial support potentially available and further fiscal- and structural-reform measures.”

The European Union and the International Monetary Fund approved an €85bn rescue for Ireland on November 28, seven months after a €110bn bailout for Greece, sparking a surge in the extra yield on Spanish and Portuguese debt.

Spreads also widened on concern about finance chiefs’ decision to open the door to restructurings of government debt after 2013 as part of a permanent crisis mechanism to replace the temporary fund created in May.

Fitch said the details of the new European Stability Mechanism aren’t yet concrete enough for the company to judge how it will affect sovereign ratings.

“The greatest potential risk to sovereign ratings from the ESM could arise from the process under which the European Commission and IMF determine that a sovereign is insolvent and therefore trigger a restructuring of private creditor claims,” it said in the report.

“It will be critical that such an assessment is conducted in a transparent manner free of political interference.”

Still, the company said the region’s “underlying credit fundamentals” are stronger than market prices indicate. The risk of a breakup of the euro area “is not sufficiently great to be factored into its sovereign ratings.”

“It is Fitch’s current opinion that the most likely outcome is that the euro area will muddle through rather than break up in the wake of systemic sovereign debt defaults or transform itself into a United States of Europe,” it said.


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