(The following statement was released by the ratings agency)
April 16 - Fitch Ratings said today that its sovereign
ratings for countries in eastern Europe do not build in any
expectation that the EU authorities will allow member states to
adopt the euro unless they meet the Maastricht criteria.
"Fitch's ratings in eastern Europe do not factor in any
expectation that the EU authorities will allow fast-track euro
adoption in response to the current economic and financial
pressures facing many countries in the region," says Edward
Parker, Head of Emerging Europe Sovereigns at Fitch.
The financial challenges facing some countries in eastern
Europe, particularly those such as the Baltic states with large
external financing requirements, fixed exchange rates and high
levels of euro-denominated debt on their balance sheets, have
raised the issue of whether early euro adoption would represent
an effective policy remedy or "exit strategy". Indeed, a recent
leaked paper from within part of the IMF reportedly advocated
that option.
However, Fitch notes that the policy of the ECB, EC and the
EU is that a country can only adopt the euro once it has met
the Maastricht convergence criteria covering price stability,
long-term interest rates, budget deficits, government debt and
exchange rate stability within the Exchange Rate Mechanism (ERM
II). Despite EU concerns about the problems faced by some
countries in eastern Europe, its willingness to provide
substantial financial assistance and the possible political
attractiveness of a "quick fix", Fitch does not expect a
relaxation of EU policy on joining the euro area.
In Fitch's view, macroeconomic imbalances, the scale of
recent boom and busts and question marks over whether countries
can restore competitiveness within the constraints of their
fixed exchange rate regimes make the idea of convergence as
relevant as ever. Fitch believes that the EU authorities remain
disinclined to "premature" euro adoption for fear that a
country might subsequently find itself unwilling or unable to
bear the economic and political cost of adjustment within the
euro area, and even possibly seek to leave it, triggering
contagion to other countries within the single currency.
Current pressures facing some existing euro area members
underline the argument. Fitch notes that the EU also opposes
unilateral euroisation (as in Montenegro and Kosovo).
Overall, despite some reservations about the adjustment
challenges they would face, Fitch believes that joining the
euro would be a net positive for eastern European countries as
it would render the risk of balance of payment and currency
crises negligible. The agency's long-standing position is that
euro adoption can lead to one- or two-notch upgrades of foreign
currency Issuer Default ratings. "If there were an unexpected
relaxation of EU policy that opened the way for early euro
adoption, then Fitch would expect to respond by taking some
positive rating actions on the countries concerned," said Mr
Parker. However, unilateral euroisation would be far less
advantageous as it would not bring access to ECB liquidity or
influence on ECB decision-making, and would lead to a loss of
"goodwill" with key EU policy makers.
Fitch's latest forecasts for euro adoption are (January)
2013 for Estonia, Lithuania and Poland; 2014 for the Czech
Republic, Hungary and Latvia; and 2015 for Bulgaria and
Romania. For the Baltic states, budget deficits are surpassing
inflation as the toughest constraints on meeting the Maastricht
criteria. Timetables for all countries are uncertain, and both
later and early dates are possible. Not least because they may
depend partly on interpretation of the criteria: even if
inflation is below the reference rate is it a "sustainable"
price performance if abetted by an extreme recession, is a
budget deficit above 3% permissible if "only exceptional and
temporary", and is an IMF programme consistent with ERM II
membership "without severe tensions"?
