Fitch casts doubt on eurozone plans to stop crisis

Fitch Ratings cast doubt today on the budget discipline pact European states intend to adopt being able to solve the eurozone debt crisis.

"Fitch has concluded that a 'comprehensive solution' to the eurozone crisis is technically and politically beyond reach," following the crisis summit last week at which the pact was announced, it said.

While it praised announcements that private bond holders would no longer be asked to accept losses and the eurozone's permanent bailout fund would be brought into operation sooner, it said it was concerned by the absence of a credible financial backstop.

"In Fitch's opinion this requires more active and explicit commitment from the ECB to mitigate the risk of self-fulfilling liquidity crises for potentially illiquid but solvent Euro Area Member States (EAMS)," it said in a statement.

The European Central Bank, strongly supported by Germany, has resisted stepping up its limited purchases of bonds of eurozone states, let alone explicitly taking on the role of a lender of last resort to governments.

The markets have welcomed the idea of the fiscal pact to help lock in budget discipline in the medium-term, they have been looking for stepped up involvement by the ECB to calm fears that countries like Italy and Spain will be driven by high borrowing costs into needing bailouts.

"In the absence of a 'comprehensive solution', the crisis will persist and likely be punctuated by episodes of severe financial market volatility," said Fitch.

It warned that such market volatility "is a particular source of risk to the sovereign governments of those countries with levels of public debt, contingent liabilities and fiscal and financial sector financing needs that are high relative to rating peers."