EU’s Permanent Fund Won’t Allay Restructuring Fear, Fitch Says

The permanent European rescue fund won’t allay investors’ concerns about peripheral nations’ debt restructuring and may not prevent sovereign downgrades in the short term, Fitch Ratings said.

“For so long as the ‘solvency’ of peripheral” countries is “in doubt, the introduction of the ESM from July 2013 as a senior creditor, combined with the political commitment to ensure private sector ‘burden-sharing,’ potentially heightens rather than diminishes market fears of a sovereign debt restructuring, including on currently outstanding debt,” Fitch wrote in a report today in London.

The European Stability Mechanism will replace the temporary European Financial Stability Facility which forms the lion’s share of the 750 billion euro ($1.1 trillion) bailout pool agreed by European leaders nearly a year ago.

The ESM has “not enhanced the prospects for so-called peripheral” nations “to secure affordable market funding -- crucial if they are to exit from emergency support and place public debt on a sustainable path and hence stabilize their sovereign credit profiles and ratings,” Fitch said.

Fitch’s rival, Standard & Poor’s, downgraded Portugal and Greece yesterday, saying the European Union’s new bailout rules may mean that both nations eventually renege on their debt obligations.

To contact the reporter on this story: Gabi Thesing in London at gthesing@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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