The European Central Bank should ramp up its buying of troubled euro zone debt to support Italy and prevent a "cataclysmic" collapse of the euro, David Riley, the head of sovereign ratings for Fitch, said on Wednesday.
Speaking to investors as part
of a European roadshow, Riley said the collapse of the euro would be
disastrous for the global economy, and while it is not Fitch's baseline
scenario, it could happen if Italy did not find a way of its debt
problems.
"The end of the euro
would be cataclysmic. The euro is a reserve currency," Riley said. "What
would that do in terms of financial and political stability?"
"It
is hard to believe the euro will survive if Italy does not make it
through," he said, adding that while many saw Italy as too politically
and economically important to be allowed to fail, "one might also argue
that it is too big to rescue."
The warning pushed the euro down to within touching distance of a new 16-month low versus the dollar.
Riley urged the European Central Bank to abandon its current reluctance to scaling up its purchases of troubled euro zone debt such as Italy's and drop its resistance to the bloc's bailout fund, the EFSF, borrowing directly from it.
"Can
the euro be saved without more active engagement from the ECB? Quite
frankly we think no," Riley said, adding that the bank had plenty of
scope to expand its balance sheet with unleashing a wave of inflation
across the euro zone.
"Why not have
the ECB come out and say 'We are going to cap interest rates', say 'We
are not going to allow interest rates to exceed 7 percent' or whatever
level they see is the limit?.. Why not turn the EFSF into a bank so it
can borrow from the ECB so it doesn't have to go to the market?"
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GREECE THE JOKER IN THE PACK
Fitch
has warned that the economic outlook for the euro zone has darkened
further in recent months, but it has said it does not expect to strip France
of its triple-A rating for this year at least. By contrast, Standard
& Poor's has singled out France for a possible two-notch cut from
its top rating.
Still, Riley cautioned the euro zone's second-biggest economy was in a precarious position as the crisis rumbled on.
"France
is the weakest AAA country in the euro zone," he said, adding it had
the additional burden of being the main country alongside Germany underpinning the euro zone's bailout fund.
Greece, meanwhile, remained a major threat for the euro zone.
Last
year's move to force investors to take losses on their Greek bonds had
destroyed the pre-crisis assumption that no euro zone country would
default, while the current debate on Greece potentially leaving the euro
was forcing investors to fundamentally rethink their view of the single
currency.
"Arguably Greece leaving
euro could be the beginning of the end for the euro," Riley said.
"Greece is still the joker in the pack. It still has the potential to
plunge the euro zone into crisis."
James
Longsdon, Fitch's head of European bank ratings, added that any sign of
euro zone breakup would lead the public, firms and investors to pull
their cash out of banks in a panic.
"If
you are a depositor in a bank where you have concerns, not only over
your sovereign but even the domination of your deposits, then it is hard
to imagine anything other than (bank) deposit instability relatively
quickly," Longsdon said.
Riley,
however, reiterated that a euro split was not Fitch's current
expectation, saying that the likely internal trauma of leaving the
single currency would deter Athens from reverting back to the Drachma.
"We don't think Greece will leave the euro. The cost benefit analysis doesn't add up," Riley said.
Sumber: Reuters
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