Fitch Ratings Does Not View European Debt Crisis Solved

Last week’s agreement among the members of the European Union and, more especially, among the 17 Eurozone countries gave markets a boost, but there’s less to the agreements than meets the eye.

Fitch Ratings has now weighed in on last week’s summit meeting and its developments:

This Summit demonstrated strong political support for the euro, and that its members are putting in place the institutional and policy framework for a more viable eurozone and ultimately greater fiscal union. But taking the gradualist approach imposes additional economic and financial costs compared with an immediate comprehensive solution. It means the crisis will continue at varying levels of intensity throughout 2012 and probably beyond, until the region is able to sustain broad economic recovery.

In the short term we predict a significant economic downturn across the region. The eurozone faces intense market pressure, which is triggering loss of business and consumer confidence, and weak industrial activity and retail sales. Our forecast of 0.4% eurozone GDP growth next year and 1.2% in 2013 would be significantly higher if there was a comprehensive solution to the crisis. The lack of a comprehensive solution has increased short-term pressure on eurozone sovereign credit profiles and ratings.

What would be included in that comprehensive solution? Fitch indicates its preference:

We still believe the [European Central Bank,] ECB, either directly through its sovereign bond purchase programme or indirectly by allowing the EFSF/ESM to access its balance sheet, is the only truly credible “firewall” against liquidity and even solvency crises in Europe.

The measures agreed to last week, including making €200 billion available to the IMF, bringing creation of the European Stability Mechanism (ESM) forward, funding it with €500 billion, and expanding the existing European Financial Stability Facility (EFSF) are all signs of progress but fail to meet the comprehensiveness test:

Hopes that the ECB would step up its actions in support of its sovereign shareholders as a quid pro quo for institutional and legal changes that gave the ECB greater confidence in the long-run commitment of eurozone governments to fiscal discipline appear to have been misplaced.

Fitch, and the rest of us, may have a long wait before before the more stable Eurozone nations, like Germany, France, and Finland, are willing to turn the ECB loose.