Following the latest efforts by eurozone policymakers to solve their sovereign debt crisis, Fitch Ratings says that while there has been progress, the outcome remains uncertain.
In a new report, the rating agency indicates that the latest policy steps support its expectation that the eurozone will survive. However, it cautions that political risk and execution risk remains. “Despite the progress made this month, solving the crisis is far from certain and any resolution will not be quick,” it cautions.
Fitch recalls that earlier this year it set out six broad areas that needed to be addressed before market speculation about the eurozone’s viability is likely to abate: European Central Bank (ECB) funding; banking supervision; a credible financial firewall; structural economic reform; fiscal integration; and political and institutional reform. And, it suggests that progress has been made on the first four.
The ECB has announced on a new, unlimited sovereign bond buying program that should lower the risk of self-fulfilling liquidity crises, Fitch says.
It notes that the European Commission’s proposal for a “single supervisory mechanism” for Eurozone banks “could help break the link between weak banking sectors and sovereign creditworthiness.” However, Fitch also says that the timetable for implementation in early 2013 is tight, and the proposal is likely to be far more ambitious than the final deal.
Structural reform has remained a priority in peripheral countries, improving growth potential, Fitch says. But, it warns that the political risks to further reform remain. “In Italy, for example, the prospect of additional reform has arisen ahead of next year’s general election,” it says. And, reform fatigue is also a risk.
Fitch says there has also been some tentative more towards greater fiscal integration, and talk about longer-term institutional reform. However, this remains uncertain at this point.
“The speed and extent of progress on all these policy measures, alongside the success of adjustment programs and prospects of a return to economic growth, will continue to inform our judgment on the likely resolution of the eurozone crisis,” it concludes.