Fitch sets out the five scenarios for the future of the Eurozone
Fitch Ratings expects the risk of alternative outcomes for the eurozone to be on a rise, although the rating agency believes the likelihood of a full break-up and demise of the euro remains very low given the huge financial, economic and political costs of this outcome.
In the report “The future of the Eurozone: alternative scenarios, preliminary analysis and potential sovereign rating implications”, analysts at Fitch have set out five possible outcomes for the European monetary union (Emu).
In order of likelihood, the scenarios are: a Greek exit from the union; a quasi-fiscal union; the co-existence of euro and German mark, after Germany exits; the creation of some kind of “United States of Europe”; and a full break-up of the eurozone.
Each of the scenarios involving the exit of one or more peripheral nations would risk severe systemic damage, while in Fitch’s view the likelihood of a move to full fiscal union remains small in the short term due to the lack of political will.
In case of a Greek exit, all eurozone sovereign ratings would be placed on “Rating watch negative” with the other countries at higher risk of a downgrade.
“Greece would very likely have to re-denominate its debt and default again. Initially, Fitch would likely downgrade Cyprus, Ireland, Italy, Portugal and Spain, owing to the ‘exit precedent’ of Greece and risk of contagion to banks, bond markets and capital flight, with Cyprus particularly vulnerable owing to its banking system’s huge Greek loan book,” the company said.
Despite this view, Fitch expects the eurozone to “muddle through the crisis”, as eurozone members are taking gradual steps towards closer fiscal and economic integration.
“The sovereign crisis has shown that Emu as originally designed is flawed and fundamental reforms are required to transform it into a viable structure. Some of these elements are being put into place including the fiscal compact as a step towards fiscal integration and pooling of fiscal sovereignty, country fiscal austerity and structural reform programmes and substantial financial assistance to peripheral countries through the European Financial Stability Fund and the European Central Bank,” Fitch said.