Fitch: comprehensive euro zone deal "beyond reach"

ROME/BERLIN (Dec 16): The credit rating agency Fitch said on Friday
it thought a comprehensive solution to the euro zone's debt crisis was
beyond reach, putting six euro zone economies including Italy on watch for potential near-term downgrades.


It reaffirmed France's top-notch triple-A rating but even here said
the outlook was now negative, meaning it could be downgraded within two
years.

Underscoring the tensions within the bloc over a crisis that has
spread relentlessly over the past two years, Italy's prime minister
urged European policymakers to beware of dividing the continent with
their efforts to fight its debt crisis.

In a swipe at Germany, he warned against a "short-term hunger for rigour" in some countries.

Germany has led resistance to allowing the European Central Bank to
ramp up its buying of government bonds on the open market to a big
enough scale to douse the crisis, but Fitch added to the pressure for
just such a move.

Fitch said that following the EU summit a week ago it had concluded
that "a 'comprehensive solution' to the eurozone crisis is technically
and politically beyond reach."

"Of particular concern is the absence of a credible financial
backstop," it said. "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 put Belgium, Spain, Slovenia, Italy, Ireland,
and Cyprus on negative watch, which could mean a downgrade within
three months. Later another agency, Moody's, downgraded Belgium's
credit rating by two notches, and said a further downgrade was possible
within two years.

Standard & Poor's had already warned 15 of the currency bloc's 17 members they were close to a downgrade.

"The systemic nature of the euro zone crisis is having a profoundly adverse effect on economic and financial stability across the region," Fitch said.

The euro edged higher against the dollar but still suffered its worst weekly performance against the greenback in three months.

German Chancellor Angela Merkel gained some respite from domestic
pressure to take a tougher line in the euro zone crisis when
eurosceptics in her junior coalition partner, the Free Democrats, who
are hostile to more bailouts lost a grassrooots party referendum aimed
at blocking a permanent rescue fund.

A victory for the eurosceptics could have brought down Merkel's
centre-right coalition, but the outcome still left the FDP split, with
its public support in tatters.

Meanwhile, a first draft of a planned fiscal compact among euro zone
countries and aspiring members, published on Friday, showed that
countries could be taken to the European Court of Justice if they fail
to meet agreed budget targets.

AUTOMATIC SANCTIONS

Merkel - under pressure from the revered Bundesbank to force
debt-saddled euro zone countries to reform and save their way out of
crisis with austerity measures - has led a push for automatic sanctions
for deficit "sinners" in the bloc.

This has fed concerns that excessive belt-tightening in southern
countries could send their economies into a negative spiral with no
prospect of growing out of crisis, while feeding resentment in the
prosperous north.

Italian Prime Minister Mario Monti said Europe's response "should be
wrapped in a long-term sustainable approach, not just to feed
short-term hunger for rigor in some countries."

"To help European construction evolve in a way that unites, not
divides, we cannot afford that the crisis in the euro zone brings us
... the risk of conflicts between the virtuous North and an allegedly
vicious South," he told a conference in Rome.

French officials have sought to prepare the public for the
likelihood that Paris will lose its top-notch rating from S&P for
the first time since 1975, playing down the potential setback and
focusing attention instead on neighboring Britain.

"The economic situation in Britain today is very worrying, and you'd
rather be French than British in economic terms," Finance Minister
Francois Baroin said in a radio interview, a day after Bank of France
Governor Christian Noyer said that if ratings agencies were
even-handed, Britain deserved to be downgraded before France.
[ID:nL6E7NG1KU]

Britain's Deputy Prime Minister Nick Clegg said French Prime
Minister Francois Fillon had called him to explain that "it had not
been his intention to call into question the UK's rating but to
highlight that ratings agencies appeared more focused on economic
governance than deficit levels."

Clegg's office said he accepted the explanation "but made the point
that recent remarks from members of the French government about the UK
economy were simply unacceptable and that steps should be taken to calm
the rhetoric."

World Bank President Robert Zoellick said he was "deeply troubled" by the exchanges.

He said politicians needed to be careful because "you've got a tinderbox out there in both political and economic terms."

Euro zone officials said potential downgrades, particularly from
S&P, could raise the cost of borrowing for the region's existing
EFSF bailout fund, but would not make a big difference to its
operations.

EFSF FIREPOWER

EFSF chief Klaus Regling told the Rome conference about 600 billion euros was available to fight the crisis.

"If Italy and Spain were to ask for support, their gross financing
needs for 2012 are less than that and I don't think they would need to
be taken off the market," he said.

The EFSF has the option of providing first-loss insurance on new
bond issues, but the country concerned would have to make a formal
request and negotiate conditionality, while the sum guaranteed would
have to be agreed unanimously by EFSF members, subject to German
parliamentary approval. [ID:nR1E7GD02J]

Euro zone countries will hold talks next Monday on the draft text of
the euro zone fiscal compact and on bilateral loans to the
International Monetary Fund, officials in Brussels said.

Slovak Finance Minister Ivan Miklos told Reuters they would commit
150 billion euros to boost the IMF's lending capacity. [ID:nL6E7NG3T8]

The United States has refused to offer additional funding and it
remains to be seen how much non-European economies such as China,
Russia, Brazil and India are willing to commit.

The European Central Bank has resisted calls to embark on unlimited
purchases of euro zone sovereign bonds to quell the debt crisis,
putting the onus on governments and their collective financial
firewalls.

ECB President Mario Draghi said on Thursday that euro zone
governments were on track to restore market confidence and the ECB's
bond-buying plan was "neither eternal nor infinite."

But in one intriguing hint on Friday, Bank of Italy governor Ignazio
Visco told the Rome conference: "The impression is that there is only
one way to convince markets, and we'll work on that." He did not
elaborate.

Banks appear to be resisting pressure from governments to come to
the aid of debt-choked euro zone countries by using cheap money lent by
the ECB to buy more sovereign bonds.

The chief executive of UniCredit, one of Italy's two biggest banks,
said this week that using ECB money to buy government debt "wouldn't be
logical."

With euro zone governments needing to sell almost 80 billion euros
of fresh debt in January alone, the stand-off between policymakers and
banks could turn the slow-burning debt crisis into a conflagration in
the New Year.

In Greece,
where the debt crisis began two years ago, a senior official of the
EU/IMF troika team negotiating terms for a second bailout package said
there was no guarantee that talks on the private sector's contribution
would lead to a voluntary deal involving the bulk of its creditors.

Agreement has been held up by wrangling over issues ranging from the
credit status and interest coupons on the new bonds to legal
guarantees to be offered by the official sector. Another key question
is how many sign up to a private sector debt swap.

Failure to secure agreement could force a disorderly default that might trigger a wider emergency across the euro zone.

Asked if there was a risk of a disorderly Greek default, the troika
official said: "Our objective is still to have a voluntary operation.
If you ask me 'Is there a guarantee that there will be a voluntary
operation?', of course there can never be a guarantee."