Euro hit by fresh warnings of debt downgrades

By John W. Schoen, Senior Producer

As European leaders prepare for yet another summit at the end of the month to resolve a widening debt crisis, they got a dire warning Wednesday that one more round of promised solutions won?t be enough to head off a financial calamity.

The call came from the head of Fitch, one of the major credit rating firms whose letter grades can cost governments billions of dollars in higher borrowings costs. David Riley, Fitch?s head of sovereign ratings, urged the European Central Bank to ramp up its buying of troubled euro zone debt to support Italy and prevent a "cataclysmic" collapse of the euro.

Unlike their U.S. counterparts at the Federal Reserve, Europe?s central bankers have balked at buying up bad bonds in bulk, largely based on fears from influential German leaders that such a move could spark a dangerous bout of inflation. ECB bond buying is also politically unpopular with German voters, who also have opposed bailouts of Europe?s weaker, ?peripheral? economies like Greece.

More recently Italy, Europe?s third largest economy and the third biggest issuer of debt behind the U.S. and Japan, has lost investor confidence that it can manage its debt payments. That?s forced up borrowing costs, as investors demand higher interest rates to buy fresh Italian debt, adding to concerns that Rome may eventually default. ?

The ECB?s monetary policy committee is scheduled to hold a regular ?monthly meeting Thursday and is expected to keep its key interest rate unchanged at one per cent.

Speaking to a meeting of investors in Frankfurt, Riley warned that the stakes of ECB inaction were rising. Bolder action is needed, he cautioned, to avoid a collapse of the euro that could spell disaster for the global economy

"The end of the euro would be cataclysmic. The euro is a reserve currency," Riley said. "It is hard to believe the euro will survive if Italy does not make it through."

Though some analysts see Italy as too important to Europe to be allowed to fail, Riley said "one might also argue that it is too big to rescue."

Riley urged the ECB to adopt a policy more familiar to U.S. central bankers by announcing interest rate targets to reassure investors that Italy's bond rates won?t rise indefinitely. He also suggested that a separate bailout fund, the so-called European Financial Stability Facility be converted to a bank, which would allow it to borrow from the ECB. U.S. officials have also urged European officials to pursue that strategy; some European leaders have argued that they don't have legal authority to do so.

Riley?s warning was not an official downgrade, but on Tuesday he said the agency will make that call by the end of this month. Fitch currently has Italy, Spain, Belgium, Ireland, Slovenia and Cyprus on so-called "ratings watch negative." Other ratings agencies Standard and Poor?s and Moody?s are also reviewing European countries for possible downgrade.

The Fitch analyst?s warnings pushed the euro down towards a 16-month low versus the dollar. U.S. stocks also fell on the news Wednesday that Germany's economy, long considered the eurozone's strongest, shrank slightly in the fourth quarter.?

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Source: http://bottomline.msnbc.msn.com/_news/2012/01/11/10121490-euro-hit-by-fresh-warnings-of-debt-downgrades

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