Fitch Also Down on Europe

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We noted earlier today that Moody's Investors Service had some cautionary words on Germany's banking system. Fitch Ratings has similar, if more general concerns.

Following yesterday's summit meeting of European Union (EU) leaders, Fitch said the pressure has increased on EU policy makers "to deliver substantial progress" at their December meeting in order to avoid a loss of credibility in the EU's "efforts to solve the eurozone crisis," which could lead to an more uncertainty about the eurozone's "vulnerability to market pressure."

The ratings agency believes that a functioning supervisory mechanism, scheduled to be in place by January 1, 2013, may not be fully operational for at least another year. Given the eurozone's demonstrated proclivity for kicking the can down the road, this assessment seems eminently fair.

Fitch zeroes in on the central issue: the so-called "legacy assets" still held by eurozone banks:

The finance ministers of Germany, Netherlands and Finland have stated that "legacy assets" should remain "the responsibility of national authorities." This appeared to contradict the aim of breaking the bank-sovereign vicious cycle, and it remains unclear how "legacy assets" would be defined.

Expecting eurozone policy makers to act quickly enough to get the supervisory mechanism in place by the beginning of next year is far from a sure bet. Without such action, though, Fitch doesn't think that the eurozone can demonstrate sufficient seriousness about solving the region's crisis.

Paul Ausick

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