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In a statement released today, Fitch Ratings indicated that it would not place all eurozone sovereigns on downgrade watch, as it would have if Greece’s elections had not supported the EU-IMF bailout plan.Even so, the ratings agency warned of significant headwinds for the euro area, writing, “The crisis in Greece and the eurozone remains intense.”
Fitch credited the downgrade reprieve to the diminished likelihood that Greece could leave the euro immediately.
Here’s the full release from Fitch:
Fitch Ratings-London-18 June 2012: The narrow victory of New Democracy in the Greek parliamentary elections means the near-term risk of a Greek disorderly debt default and exit from the euro has fallen. A new government that is supportive of the EU-IMF programme is likely to be in place prior to the EU Leaders Summit on 28-29 June.
Consequently, Fitch will not place all eurozone sovereigns on Rating Watch Negative as it had indicated would be the case if a Greek euro exit were a probable near-term event.
The crisis in Greece and the eurozone remains intense. Fiscal austerity and painful structural reform combined with a strong parliamentary opposition led by Sryzia means that the new Greek government is likely to be fragile.
The pace of economic contraction is almost certainly accelerating. The country’s liquidity position is fast deteriorating, underscoring the urgency of forming a new government and the resumption of disbursements under the EU-IMF programme. It will be challenging to significantly ease the austerity programme without receiving additional funds, although there is some room for manoeuvre on the financing profile of the existing programme.
While the risks from Greece have fallen for now, the severity of the systemic crisis engulfing the eurozone is unlikely to diminish until European leaders articulate a credible road-map that would complete monetary union with much greater fiscal and financial integration.
Downward pressure on the sovereign credit profile and ratings of eurozone sovereign governments will intensify so long as a credible path to closer union and a more coherent and united policy response are absent. This includes further boosting the financial backstops against contagion.