Fitch casts doubt on European plans to stop crisis

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Fitch Ratings cast doubt Friday on the budget discipline pact European states intend to adopt being able to solve the eurozone debt crisis, and warned it may soon downgrade six countries, including Spain and Italy.

Also Friday, Moody's ratings agency took action against a eurozone member, downgrading Belgium's credit rating by two notches.

Fitch also changed the outlook on France's top triple-A rating to negative.

"Fitch has concluded that a 'comprehensive solution' to the eurozone crisis is technically and politically beyond reach," following the crisis summit last week at which the pact was announced, it said.

All EU states except for Britain agreed last week to draft a strict pact with penalties to ensure they cut budget deficits and reduce their debt, aiming to get it drafted and signed by March.

While Fitch praised announcements that private bond holders would no longer be asked to accept losses in bailouts and the eurozone's permanent bailout fund would be brought into operation sooner, it expressed concerned over 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 (EAMS)," it said in a statement.

The European Central Bank, strongly supported by Germany, has resisted stepping up its limited purchases of bonds of eurozone states, let alone explicitly taking on the role of a lender of last resort to governments.

While the markets have welcomed the idea of the fiscal pact to help lock in budget discipline in the medium-term, they have been looking for stepped up involvement by the ECB to calm fears that countries like Italy and Spain will be driven by high borrowing costs into needing bailouts.

"In the absence of a 'comprehensive solution', the crisis will persist and likely be punctuated by episodes of severe financial market volatility," said Fitch.

It warned that such market volatility "is a particular source of risk to the sovereign governments of those countries with levels of public debt, contingent liabilities and fiscal and financial sector financing needs that are high relative to rating peers."

Meanwhile, Moody's, citing too tough conditions for indebted European countries to borrow with little chance of a quick end to the eurozone crisis, cut the credit rating of Belgium by two notches, from Aa1 to Aa3, with a negative outlook.

"The first driver underlying Moody's decision to downgrade Belgium's debt rating is the fragile sentiment surrounding sovereign risk in the euro area," the agency said.

"The fragility of the sovereign debt markets is increasingly entrenched and unlikely to be reversed in the near future," it said.

Fitch said it was reviewing for possible downgrade the credit ratings of six eurozone countries facing such higher risks.

Placing Belgium, Spain, Slovenia, Italy, Ireland and Cyprus on Ratings Watch Negative "indicates that the above ratings are under active review and are subject to a heightened probability of downgrade in the near-term," said Fitch.

It added that any downgrades of ratings would likely be limited to one or two notches and that it expects to make decisions by the end of January.

Belgium currently has an AA+ rating from Fitch, Spain AA-, Slovenia AA-, Italy A+, Ireland BBB+, and Cyprus BBB.

While affirming France's triple-A rating, Fitch revised its long-term outlook on the rating to "negative" from "stable", although this does not signify the rating is under review.

"The intensification of the eurozone crisis since July constitutes a significant negative shock to the region and to France's economy and the stability of its financial sector," Fitch said in a statement.

France's national statistics agency said Thursday the country has likely entered a shallow recession that will last through the first quarter of next year.

France's top rating was under more immediate threat from Standard & Poor's, which has said it plans to quickly review for possible downgrade the ratings of most eurozone countries following its evaluation of measures announced at the summit.

The third major ratings agency, has also announced it is reviewing its ratings of European countries.

© 2011 AFP

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