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Fitch: Extensions Shift Pace, Not Path, of Euro Crisis Response
May 30, 2013 / 2:42 PM / 4 years ago

Fitch: Extensions Shift Pace, Not Path, of Euro Crisis Response

LONDON, May 30 (Fitch) The European Commission's recommendation to allow five eurozone sovereigns additional time to cut their deficits recognises that previous deficit reduction targets were too ambitious in the face of recession and rising unemployment, Fitch Ratings says. However, an easing in the pace of fiscal austerity will not be sufficient to underpin a broad-based and sustainable economic recovery without further progress on banking union and structural reforms to raise the growth and job-creation potential of economies across the region. The shift in emphasis from front-loaded fiscal austerity to structural reform signals the increasing pressure on policymakers to stem rising unemployment and promote economic recovery rather than a reversal of the commitment to fiscal consolidation. Broadly, our eurozone sovereign ratings already incorporate less stringent deficit reduction targets than those previously set out, reflecting the weaker economic outlook. In March we cut our forecast for GDP growth in the eurozone in 2013 by 0.4pp - we now forecast a 0.5% contraction this year - and our 2014 forecast by 0.2pp. We already expected France, Spain and the Netherlands to miss their previous 2013 deadlines to reduce their deficits to 3% of GDP. All of them have now had the deadlines extended (France and Spain by two years to 2015 and 2016 respectively, the Netherlands by one year to 2014). While extending its headline deficit deadlines, the Commission has reiterated the need for both fiscal consolidation ("backtracking" is not an option") and structural reform to boost growth potential. This is consistent with the important change of emphasis in the eurozone authorities' attempts to tackle the crisis that we discussed in our 2013 Global Sovereign Outlook, published in December. There has been a shift to a more nuanced approach that looks through the cyclical component of sovereign deficits and focuses on the implementation of well-designed deficit reduction measures rather than headline results. Such an approach was seen in Spain, for example, where no additional measures were requested in November despite the Commission's 2013 deficit forecast substantially exceeding official forecasts. This shift in emphasis acknowledges that adjustment will take time and that targets should be realistic, which is arguably preferable to setting stricter targets that are repeatedly missed. It will also ease the headwind to recovery created by simultaneous budgetary austerity. However, repeatedly extending deficit reduction targets will erode confidence in the eurozone's new fiscal framework, which is supposed to enhance coordination and discipline, and delay the point at which government debt-to-GDP ratios stop rising. The ability and willingness of eurozone sovereigns to stabilise and reduce their debt-to-GDP ratios remain key drivers of our eurozone sovereign ratings. Confidence in the sustainability of public finances in the eurozone depends not only on reducing budget deficits but also securing broad-based and sustainable economic recovery. Structural reforms that enhance the growth and employment potential of the region's economy as well progress on banking union and efforts to ease the supply of credit are key in this regard. Contact: David Riley Managing Director Sovereigns +44 20 3530 1175 Fitch Ratings Limited 30 North Colonnade London E14 5GN Gergely Kiss Director Sovereigns +44 20 3530 1425 Mark Brown Senior Director Fitch Wire +44 20 3530 1588 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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