TEXT-S&P: eurozone could start to overcome debt crisis in 2013

Reuters

Jan 9 - This could be a decisive year in determining whether the eurozone

(European Economic and Monetary Union) can emerge from its sovereign debt

troubles, says Standard & Poor's Ratings Services today in the report: "The

Eurozone Debt Crisis: 2013 Could Be A Watershed Year."

It could mark the start of the region sustainably overcoming the market

volatility and fragmentation that has affected it over the past few years. It

could also see the return of some so-called "program countries"--member states

that have borrowed from the European Stability Mechanism (ESM, unrated) or the

European Financial Stability Facility (EFSF AA+/Negative/A-1+) multilateral

loan programs--such as Ireland and Portugal, to more substantial primary

issuance in the capital markets.

"Nevertheless, we believe that investor confidence will only return if member

states continue to make progress in rebalancing their economies, both through

structurally stabilizing public debt and by further reducing external

deficits," said Standard & Poor's credit analyst Moritz Kraemer. "Achieving

this will take a disciplined and transparent response from policymakers both

at national and European levels. Safeguards to the social contract may also be

necessary to assist in the cohesion of those member states suffering from high

unemployment, excessive private leverage, and stagnating or falling living

standards."

In our view, this is a challenging but achievable agenda, although

implementation risks loom large. These risks are the main reason that the

majority of our outlooks on our eurozone sovereign ratings are still negative.

Nevertheless, European leaders have laid, or at least announced, much of the

groundwork for the eurozone to emerge from its lingering crisis.

The eurozone's success in reversing its credit trends will depend on national

and pan-European policymakers' responses to the eurozone's continuing

economic, political, and social risks, the report says.

We believe that economic rebalancing has still some way to go and will

seriously challenge political leaders. We are also of the view that the

economic and social costs of economic rebalancing could be more easily

contained if a higher degree of policy coordination were to lead to a more

symmetrical adjustment shared between the eurozone's core external surplus and

peripheral deficit countries, rather than with most of the burden falling on

the latter.

While there have been noteworthy new policy developments, such as Outright

Monetary Transactions and the ESM, none of these tools have yet been used and

implementation risks remain, the report says. Another key risk, in our view,

would be the sense of complacency that could develop along with an improvement

in market conditions. Complacency could lead to the fragile agreements among

European policymakers unraveling if some consider that the eurozone's troubles

have passed and previously agreed actions can be shelved or watered down.

"We consider that it is too early to firmly state that complacency risk has

materialized. We are of the view, however, that the consensus among European

policymakers may be more brittle than generally appreciated," said Mr. Kraemer.

With the key of successful crisis resolution in the hands of governments, the

electoral calendar remains a vital factor in assessing the future course of

policies as well as progress in crisis resolution. The main elections in 2012,

in Greece, France, and The Netherlands, resulted in governments that took an

overall constructive view on crisis resolution efforts. It is our base case

that the elections we consider the most important in 2013--Italy in February,

Germany and Austria in the autumn--will similarly lead to a continuation of

the current policy path.

http://www.reuters.com/article/2013/01/09/idUSWNB291620130109