Fitch sees OMT as positive factor in latest Eurozone Sovereign Snapshot

The European Central Bank’s OMT programme of bond purchases, OMT, is seen as a positive factor in rating agency Fitch’s latest Eurozone Sovereign Snapshot report.

“From a sovereign ratings perspective, the ECB’s initiative is positive,” wrote Fitch head of Global Sovereign Ratings David Riley.

“Potentially unlimited intervention by the ECB in the sovereign bond market with no loss of seniority for existing creditors lowers the risk of self-fulfilling liquidity and even solvency crisis. It could also greatly ease the re-entry into markets of existing EU-IMF programme countries, notably Ireland (‘BBB+’/Negative) and Portugal (‘BB+’/Negative).”

“If it is successful in eliminating the convertibility risk premium – the extra interest rate cost that reflects fears of a break-up of the eurozone – it will ease financing and credit conditions for the economy as well as the sovereign and render ECB monetary policy more effective.”

That said, there are still plenty of hurdles for the ECB to overcome, if Europe is to return to a measure of “stability”.

“Only time will tell if the greater willingness of the ECB to do ‘whatever it takes’ to save the euro – albeit without the backing of the Bundesbank – and progress towards banking union will mark a turning point in breaking out of the ‘bad equilibrium’. There is no shortage of potential pitfalls that could break the relative calm of European financial markets in recent months.”



Triggers for ratings action  Negative  Positive
Greece Greek exit from the eurozone accompanied by forcible redenomination of sovereign andprivate sector debt. Sustained implementation of the EU-IMF programme leading to tangible economic recovery.

Materially worse-than-expected economic performance.

Significant slippage from the government’s fiscal deficit targets.

Evidence that the adjustment is on track, including a continued narrowing of the twin deficits and progress in structural reforms,
would be positive for the rating.

Successful market access in 2013.


Significant worsening of European debt crisis. A much worse-than-expected deterioration in the asset quality and profitability of banks.

Delays or failure in securing official aid to fund budget financing needs after 2012 and
bank recapitalisation.

Steps towards European banking union means pooling of Cyprus’ fiscal cost of bank
recapitalisation across euro zone member states.

Gas and oil exploration reaps material economic and fiscal benefits and sooner than


Materially weaker near and medium-term economic outlook than currently forecast by Fitch.

Intensification of the Eurozone crisis that had a significant adverse impact on the chances of returning to market  financing.

Significant additional recapitalisation needs of the banking sector.

Substantial cut in public debt through sharing the burden of Irish bank recapitalisation at EZ level.

Return to market financing and completion of EU-IMF programme.

Successful implementation of the IMF-EU programme. Fiscal performance in line with Fitch
forecasts and programme targets.


Intensification of the eurozone crisis with a persistent and adverse impact on sovereign
funding conditions.

Materially weakerthan-expected near and medium-term economic growth.
Failure to place government debt to GDP ratio on a downward path by 2014.
Policy uncertainty, especially on structural economic reform.

Fiscal performance in line with government targets.

Structural reforms that enhanced the competitiveness and medium-term growth
potential of the economy.

Progress towards the resolution of the eurozone crisis that materially eased sovereign funding conditions.


An even more severe recession and material slippage in reducing the structural budget deficit would further weaken government debt dynamics.

Intensification of the Eurozone crisis that exacerbated private capital flight and hindered
sovereign access to affordable market funding.

Bank recapitalisation requirements significantly
in excess of Fitch’s ‘base-case scenario’ estimate of EUR60bn that fell solely on the Spanish
government to finance.

Faster-than-anticipated reduction in fiscal and
external deficits.

Transfer of bank recap costs to ESM leading to a drop in the public debt ratio.

Interventions by the ECB and EFSF/ESM that stabilise market funding conditions for the sovereign and private sector that supported a stronger than anticipated economic recovery.


Bank recapitalisation costs are materially larger than expected.

A worsening of the European debt crisis.

Further deterioration in funding conditions, which limits government borrowing from private sector.

Significant slippage in pension reform.

Steps towards European banking union means pooling of Slovenia’s fiscal cost of bank recapitalisation across euro zone member states.
Fiscal performance broadly in line with government targets.

Material slippage against fiscal targets.

Sizeable increase in state banking system

A moderation of the eurozone debt crisis.

Success at placing public debt/GDP on a downward trajectory.


Material slippage from the fiscal targets that the
government has set itself.

Crystallisation of contingent liabilities onto the French state balance sheet, due to an intensification of the eurozone crisis.

Weaker-than-expected economic performance
that prompts a  re-assessment of France’s
medium to long-term growth potential.

Economic and fiscal performance meets government targets.
A moderation of the eurozone crisis.

In the absence of a material adverse shock, most likely associated with dramatic
worsening of the Eurozone crisis,

Fitch does not expect to resolve the Outlook until 2013.


Material worsening of the eurozone debt crisis.

Significant post-election fiscal slippage.

A credible fiscal consolidation programme that incorporates the impact of ageing and a period of prolonged low economic growth
would support the rating.
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