Though the agency remains confident that the 17-nation eurozone will not break up over the next year, it is concerned about the weak economic outlook and is urging the European Central Bank to step up its involvement in solving the crisis, notably by buying more government bonds in the markets.
Fitch's head of sovereign ratings David Riley said the agency will give its verdict on several euro countries by the end of January. Fitch currently has Italy, Spain, Belgium, Ireland, Slovenia and Cyprus on so-called "ratings watch negative" and Riley said the reductions could be up to two notches.
Much interest in the markets centres on Italy, the third-largest eurozone economy and considered too expensive to bail out. Riley says it is the "front line" of Europe's debt crisis especially as it has to tap bond market investors heavily this year.
"The future of the euro will be decided at the gates of Rome," he said at a conference in London.
Though Italy has a relatively low budget deficit in comparison to its economy, the country is saddled with massive amounts of debt and will have to raise up to €360 billion ($458 billion), according to Fitch.
Italy has found itself in financial trouble in recent months, with investors demanding increasingly high interest rates to lend it more money. Its long-standing prime minister, Silvio Berlusconi, was forced to resign late last year as the economic backdrop darkened, making room for a caretaker government under well-respected economist Mario Monti.
Riley said the challenge of Monti's government is to convince investors it has a proper strategy to keep a lid on spending but also that it has a strategy for economic growth. An expanding economy helps keep a country's debt to GDP ratio under control.
Many economists think that the eurozone as a whole will fall into recession this year as the debt crisis has ravaged economic confidence and prompted banks keep a lid on their lending. For Riley, getting growth going again is crucial if Europe is to finally emerge from a two-year crisis.
"Until we see broad-based economic recovery, only then will we be able to say the crisis is over," Riley said.
With Italy's economy stagnating at best, investors remain unconvinced about the country's prospects — the yield on the country's ten-year bonds, an indication of the rate it would pay to raise 10-year money, hovered around the 7 per cent mark on Tuesday. That is widely considered unsustainable in the long-run.
Italy has a debt burden of around €1.9 trillion ($2.4 trillion), way more than the backstop the eurozone has so far provided and more than the debt levels Greece, Ireland and Portugal. Those three countries eventually had to be bailed out by their partners in the eurozone and the International Monetary Fund.
Riley said the lack of a financial firewall is one of the reasons why there's a "significant chance" Italy's A+ rating will be cut.
Riley said France, the eurozone's second-largest economy, is also facing difficulties because of its debt burden, which is over 80 per cent of GDP, though its cherished triple A rating is not one of those facing an imminent cut by Fitch.
France's rating faces stress from the exposure of its banks to the European debt crisis and its position as a major contributor to Europe's bailout fund, the European Financial Stability Facility, Riley said. He noted that the country has to constantly tap markets to raise cash because the profile of its debt is relatively short-term, in contrast with Britain, for example.
Though France's top rating remains with Fitch, the markets are awaiting the verdict of rival Standard & Poor's, which said a month ago that it may downgrade the country, as well as others, on concerns over the ability of the eurozone to get a grip on its debt woes.
Lower ratings matter because they potentially make it more expensive for governments to raise money in the markets. The escalating debt crisis has been partly fueled by downgrades by the ratings agencies.
Overall, Fitch's Riley said the crisis is likely to be prolonged and punctuated by episodes of extreme volatility and that without greater involvement by the European Central Bank through the purchase of government bonds in the markets, the eurozone's current firewall, the EFSF, is "not credible."
He warned that political instability, fueled by discontent over the impact of austerity measures, could trigger problems in resolving the two-year debt crisis.
Riley also said that Greece will remain at the heart of the crisis over the coming months as it seeks to negotiate a deal with private creditors on reducing the value of their holdings of Greek debt. He said even that deal would fail to materially lighten Greece's debt load, though he was confident Greece would still be a member of the eurozone this time next year.