Fitch: 2011 a Critical Year in the Euro Area Sovereign Debt Crisis
Baku, March 4 (AZERTAC). Fitch Ratings says 2011 will be a critical year in the euro area sovereign debt crisis, which will either mark the beginning of its end or, if policy goals and market expectations are not realised, potentially lead to it further broadening and intensifying.
“The combination of an enhanced European-level policy response, fiscal austerity and structural reform at the national level, as well as a gradually more broad-based and secure economic recovery will mark the beginning of the end of the euro area sovereign debt crisis,” says David Riley, Fitch`s Head of Global Sovereign Ratings. “However, if one or more of these expectations is not realised, the crisis could broaden and intensify,” Riley added.
Adherence to budget deficit reduction plans is essential for strengthening confidence in sovereign creditworthiness. Despite governments` poor track records in meeting previous official budget and debt targets, it is evident from Fitch analysts` discussions with senior policymakers that the political commitment to the 2011 budget targets is very strong, including a willingness to announce further fiscal measures if necessary. Failure to deliver the promised fiscal consolidation will exacerbate concerns about solvency and likely result in negative sovereign rating actions.
The macroeconomic imbalances that fuelled a rapid rise in indebtedness, inflated real estate markets and rendered governments and banks vulnerable to adverse financing conditions are gradually being addressed. As these imbalances unwind, the euro area recovery should become more secure and broaden to the “periphery” despite its competitiveness gap with the “core”. The economies of Spain, Greece, Ireland and Portugal are all forecast to begin to emerge from recession in H211. If these economies do not recover as expected, it may prompt a re-assessment of their medium-term growth potential, a key input in Fitch`s assessment of public debt sustainability and sovereign creditworthiness.
Fitch`s ratings effectively discount the risk of a disorderly “break-up” of the euro area. The political commitment to the euro remains extremely strong, in part because of the profound financial, economic and political consequences of a break-up. Although Fitch does not expect the euro area to transform itself into a fully fledged fiscal and political union, some further dilution of national sovereignty over economic and fiscal policies is required to credibly strengthen the Europe-wide policy framework and reduce the risk of the re-emergence of severe macroeconomic imbalances that could again destabilise the region.
Other news in this section
