Downgrades more likely if no coherent EU plan: Fitch

The risk of credit downgrades for eurozone governments will intensify if European leaders cannot agree a credible and coherent policy response to the bloc's debt crisis, ratings agency Fitch said on Friday. Euro zone leaders must deliver on fiscal consolidation and structural reform, engineer a broader economic recovery and create a coherent and comprehensive EU policy response David Riley, head of global sovereign ratings at Fitch, said in an interview with Reuters Insider TV.
Asked if the risk of downgrade would intensify if such a policy package was not delivered, Riley said: "Yes." Euro zone leaders are meeting in Brussels later on Friday to agree rules to constrain national debts in the future, the first of a series of crucial meetings this month aiming to draw a line under the European debt crisis.
Riley said a boost to the lending capacity of the European Financial Stability Facility and the European Stabilisation Mechanism crisis funds would reduce eurozone default risk. "It would help," he said. Riley said Portugal would face most immediate market pressure without an all-embracing rescue plan. "If there's not a credible and comprehensive policy response there's going to be quite intense pressure on Portugal in the market," he said.
Riley said Greece was struggling most to convince investors of its solvency, despite the commitment in Athens to fulfil obligations under a joint European Union/International Monetary Fund 110 billion euro financial aid programme agreed last year.
"Greece is clearly the country that faces the greatest challenge in terms of its solvency," Riley said. "Our discussions with the Greek authorities suggest they remain committed to trying to implement the programme agreed with the IMF and the EU." Whatever plan EU leaders do manage to deliver, it is likely to have to include a debt restructuring of at least one euro zone nation's debt, according to Carmen Reinhart, senior fellow at the Peterson Institute for International Economics in Washington.
"Given the orders of magnitudes of public and private debts it would be inevitable. It is not a substitute for the austerity, it is a complement to it," said Reinhart, co-author of a history of 800 years of sovereign default with Harvard professor Kenneth Rogoff.
"It is unrealistic to assume that countries like Ireland or Greece can go on with strict austerity, not really growing. The evidence for growing your way out of debts is not there," Reinhart told Reuters Insider. "I think facing up to a default, or more likely a restructuring, is something that has to be taken on hand."