The European Union will probably stick to a policy of seeking temporary solutions to its debt crisis in the coming weeks rather than move toward a fiscal union or breakup of the euro, a top Fitch Ratings official said.
The crisis in the bloc is one of management rather than the result of Europe’s bad fundamentals, said Richard Hunter, Fitch’s Group Managing Director for Corporate Ratings for Europe, Middle East, Africa and Asia Pacific.
Euro-area finance ministers agreed at a meeting in Brussels yesterday to work on boosting the resources of the International Monetary Fund so it can “cooperate more closely” with the European Financial Stability Facility in fighting the crisis, which has threatened countries such as Italy and Greece with debt default.
“We have three options and only a few weeks by the end of the year,” Hunter told a Credit Risk Management conference in Belgrade, Serbia, today. The three anticipated scenarios include a fiscal union, a “muddle-through” approach of temporary solutions, and a euro breakup.
Fitch considers the “muddle-through” as the most likely scenario “so different band-aids keep things going forward” and “the more you move along with the sticking bands or plasters, the more chance there is of a failure,” he said.
Talk of the euro area “becoming un-investable is kind of stupid” because of 330 million people who have to buy something with their own currency, Hunter said.
The EU resembles a company in its efforts to save the euro, he said.
“If a company is generally performing well but bits aren’t, that’s a management issue,” he said. “That gives you a picture of 17 people sitting in a room pointing fingers at each other and not 17 people sitting in a room and creating solutions. So the crisis of the euro zone is very much one of management, of policy making, rather than the one of fundamental economic crisis.”
Even if a solution is found soon, it won’t remove the issues as long as the sovereigns don’t agree to give investors an incentive to come back to the market, he said.
“Italy, for example, is not insolvent, it’s nowhere near insolvency, it’s fine, but the issue is whether the market has an appetite for its debt,” he said.
The Fitch ratings of sovereigns and companies are higher than current market pricings because the agency looks at fundamentals, the official said.
With a prospect of hardly any growth in the euro zone in 2012 and a chance of a global double-dip recession, as even countries like China experience soft-landing, the post-crisis recovery is going to be “a long, slow, frightening and painful process” that will take years, with more bad news to come for stock markets, credit becoming even more expensive, and some currency volatility “outside major currency blocs,” Hunter said.
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