Saying that a comprehensive solution to the euro zone debt crisis was “technically and politically beyond reach,” Fitch Ratings on Friday advocated deeper involvement by the European Central Bank (ECB), something that Germany has been fighting against.
Reuters reported that the ratings agency was not impressed by efforts of European Union leaders at the recent summit meeting, nor the agreement that came out of the summit, but instead expressed concern that an effective solution to the debt crisis could be found at all. It put Italy and five other euro zone countries on a negative watch for potential near-term downgrades, and although it reaffirmed France’s AAA rating, it too is on negative watch and could be downgraded within two years.
While Germany has been firmly opposed to the ECB buying enough government bonds to quell investor worries, Fitch is pushing in that direction. After the conclusion of the EU summit, the agency said that it had concluded that “a ‘comprehensive solution’ to the eurozone crisis is technically and politically beyond reach.”
It added, “Of particular concern is the absence of a credible financial backstop. In Fitch’s opinion 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.” It then proceeded to put Belgium, Cyprus, Ireland, Italy, Slovenia and Spain on negative watch, which means they could be downgraded within three months. After it took that action, Moody’s followed with a two-notch downgrade of Belgium.
Fitch also said, “The systemic nature of the euro zone crisis is having a profoundly adverse effect on economic and financial stability across the region.” Standard & Poor’s has already threatened 15 out of the 17 euro zone member states that they could be in for downgrades.