Fitch Says Portugal, Spain Bailout Risks Are Overblown, Euro Won't Split

Portugal and Spain may be able to avoid a financial rescue as the euro region is likely to “muddle through” an economic recovery, according to David Riley of Fitch Ratings.

“Fears about the solvency of the Spanish state are overdone,” Riley, the head of sovereign ratings at Fitch, said in a presentation in London today. Portugal’s current 10-year bond yields of nearly 7 percent “if temporary, are affordable. In the short term, they’ll live with that. There’s little doubt of their commitment to avoid going to the International Monetary Fund.”

National credit ratings in the euro region remain at risk as the “systemic” debt crisis will create more episodes of market turmoil, he said.

The euro region’s so-called peripheral countries have suffered downgrades from Fitch, Moody’s Investor Service and Standard & Poor’s amid surging budget deficits and slumping economic growth. Bailouts of Greece and Ireland by the European Union and IMF have focused scrutiny on other high-deficit countries such as Portugal, Spain and Belgium.

Fitch estimates the risk of a breakup of the euro area remains “small” as efforts by peripheral nations to tame their budget deficits are showing signs of success. That may stabilize their credit profiles, Riley said.

“If governments meet their targets, a lot of the heavy lifting toward debt sustainability will have been done in 2011,” he said. Greece has so far exceeded expectations, while Ireland is regaining its competitiveness, he said.

Spain Bank Risk

The euro area’s AAA-rated nations aren’t at risk of a Fitch downgrade because of the potential costs of bailing out their more-indebted peers. That “isn’t a concern for us at the moment,” Riley told reporters at the event.

Fitch would reconsider Spain’s rating should the nation incur a “much larger” cost to recapitalize its banks than the rating company’s estimate of 20 billion euros to 30 billion euros ($41 billion), he said.

Spain and Greece will keep facing investor scrutiny until they succeed in stabilizing their budgets and the economic recovery broadens, Riley said. Should Greece stray from debt- reduction targets, there’s a chance its BB+ rating “will come down further,” he said.

Downgrades for Portugal would be triggered by a failure to meet fiscal targets, an absence of sustained economic rebalancing and a loss of access to the bond market, according to slides accompanying Riley’s presentation.

Greece’s creditworthiness may be cut if the economy doesn’t recover in the second half of this year and the country requires more international help should it still be unable to tap international bond markets, he said.

To contact the reporter on this story: Paul Dobson in London at pdobson2@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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