RPT-Fitch: Eurozone Debt Figures Show Major Achievements, Challenges

Fri Apr 25, 2014 8:36am EDT

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April 25 (Reuters) - (The following statement was released by the rating agency)

Government deficit and debt figures for 2013 illustrate both the magnitude of fiscal consolidation undertaken in the eurozone and the challenge eurozone sovereigns still face in stabilising and reducing public debt ratios, Fitch Ratings says.

Figures released by Eurostat on Wednesday showed that the aggregate government deficit to GDP ratio in the eurozone fell to 3.0% in 2013 from 3.7% in 2012, and close to our forecast of 3.1%. The aggregate deficit has more than halved from 6.2% of GDP since 2010.

The consolidation is broad. The deficits of 11 of the 16 eurozone member states with headline deficits in 2013 fell compared with a year earlier. Two were unchanged (including Italy, at 3% of GDP). Bank recapitalisation costs in Greece and Slovenia contributed to widening deficits - Slovenia's deficit rose to 14.7% from 4%, due to one-off bank recapitalisation costs. Germany was close to balance.

However, budget deficits are still large. The aggregate deficit excluding Germany was 4.3% of GDP in 2013, and deficits in France, Portugal, Cyprus, Spain, and Ireland were between 4.3% and 7.2%. So although the aggregate deficit has fallen to the 3% of GDP maximum under the Stability and Growth Pact, seven eurozone member states have deficits above this.

Narrowing budget deficits, particularly structural deficits in the periphery, are one aspect of more generally improving credit fundamentals among eurozone sovereigns. The continued decline in government deficits is consistent with our projection that the public debt/GDP ratio for the eurozone as a whole will peak this year. Nevertheless, the government debt/GDP ratio remains high, rising to 92.6% at end-2013 from 90.7% at end-2012, according to Eurostat, and up from 66% in 2007.

Debt/GDP is significantly higher than the aggregate level in the countries hit hardest by the global financial and eurozone sovereign debt crises, and is still rising in many countries. Eurozone public sector debt burdens will probably require several more years of austerity to stabilise and start to fall due to the weak medium-term growth outlook for the region. Moreover, high public debt leaves sovereigns poorly placed to absorb further economic or financial shocks, and reduces policy and financing flexibility.

This is one reason we are generally cautious about the medium-term outlook for the eurozone. Downbeat growth expectations and falling inflation suggest that debt reduction will remain challenging. It will be difficult for eurozone countries to achieve the kind of growth rates and primary balances that in the past have enabled developed countries achieve very large general government debt reductions.