–Fitch Analyst Spells Out Downgrade Triggers For Spain, Portugal
–UK, France, Germany At Risk If Double Dip Or Rapid Rate Rise
–Sees Further Serious Market Turmoil Likely
–But Risk Of Euro Area Break-up Remains Small
–Fitch Calls For EU Clarity On Debt Restructuring

LONDON (MNI) – Euro zone sovereign ratings will continue to face
pressures until their fiscal policies and economic recoveries become
sustainable, Fitch Ratings said Friday.

At a conference here on the European Credit Outlook, David Riley,
Fitch’s Head of Global Sovereign Ratings, said “2011 will be a crucial
year as governments pursue fiscal austerity and, at the European level,
the new policy framework and rules of the game are defined for
governments and investors.”

“The crisis is systemic in that it reflects concerns about the Euro
and Euro area governance, as well as peripheral country vulnerabilities,
and it will require a European wide as well as national level policy
response,” Riley added.

Despite these challenges, Riley continued, “Fitch believes that
underlying credit fundamentals are stronger than current levels of risk
pricing imply, and that the risk of a break up of the Euro zone remains
small. However, until governments are seen to have placed public
finances on a sustainable path and economic recovery is secure,
sovereign credit ratings will remain under pressure and further bouts of
market turmoil are likely.”

He spelt out the potential triggers for new credit downgrades in
Europe.

“We see the downgrade triggers for Spain in 2011 as being larger
than expected bank recapitalisation costs costs, a slippage against
fiscal targets also a weaker than forecast recovery,” he said.

“The downgrade triggers for Portugal would be a failure to meet its
fiscal targets, an absence of a sustained re-balancing or loss of market
access,” he added.

Even the big European triple A’s could be at risk in the event of a
double-dip recession or a rapid rise in interest rates.

“A double-dip recession in the UK, Germany or France or rapidly
rising interest rates would negatively affect the agency’s outlook for
these countries.”

Riley said that so long as governments managed to achieve their
2011 budget targets “then, actually, a lot of the ‘heavy lifting’ in
terms of fiscal adjustment will have been done.”

But further periods of serious volatility could be expected, the
Fitch analyst said.

“We do expect to see a couple more periods of extreme market
volatility, similar to that seen before Ireland agreed to the EU/IMF
package.”

“While we believe the euro zone’s underlying credit fundamentals
are stronger than current levels of price risking indicate, the
prevalence of further negative market sentiment during 2011 cannot be
ruled out,” he said.

Fitch also called on the EU to adopt a clearer stance on the issue
of debt restructuring, blaming ambiguity on this for recent market
volatility:

“I think the ambiguous approach to the debt restructuring issue is
causing market volatility and will continue to do so until something
more definite is said.”

Fitch also called on Spain to issue a credible plan for the
restructuring of its troubled caja sector:

“Most small banks and cajas will still have very limited access to
wholesale funding and remain reliant on the ECB unless there is a deeper
restructuring of the caja sector”.

–London Bureau; Tel: +442078627492; email: ukeditorial@marketnews.com
wwilkes@marketnews.com
dthomas@marketnews.com
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