Italy, Spain Ratings Cut by Fitch; Belgium Is Put Under Review by Moody’s
Fitch Ratings downgraded Italy and Spain on concern they will struggle to improve their finances as Europe’s debt crisis intensifies, while Moody’s Investors Service put Belgium on review for a possible cut.
Spain had its foreign and local currency long-term issuer default ratings cut to AA- from AA+, while Italy had the same set of ratings lowered to A+ from AA-, Fitch said in statements yesterday. The outlook for both countries is negative. Fitch also maintained Portugal’s rating at BBB-, saying it would complete a review of that ranking in the fourth quarter.
Belgium’s Aa1 local- and foreign-currency ratings were placed under review for a downgrade by Moody’s because of rising funding risks for euro region nations with high levels of debt and additional bank support measures which are likely to be needed.
The downgrades for Spain and Italy reflect “the intensification of the euro zone crisis,” Fitch said, citing risks to Spain’s “fiscal-consolidation” efforts. “A credible and comprehensive solution to the crisis is politically and technically complex and will take time to put in place and to earn the trust of investors,” Fitch said of Spain.
Italy and Spain, the third- and fourth-largest economies respectively in the 17-nation euro area, are scrambling to avoid the fallout from the debt crisis as Greece moves closer to default. Borrowing costs for both nations surged to euro-era record highs in August, prompting the European Central Bank to prop up their bonds on the secondary market.
“There are two things Italy needs to do. One is to work on reacquiring a sufficient level of international credibility to maintain its financial house in order,” Fiat SpA (F) Chief Executive Officer Sergio Marchionne said after a speech in Montreal yesterday. “The other thing that you need is to increase the purchasing capability of the Italian public.”
Fitch’s cut of Italy was its first since October 2006. It follows downgrades of Italy by Moody’s on Oct. 4 and Standard & Poor’s on Sept. 19, which both cited concerns that the country’s weak economic growth means it will struggle to reduce Europe’s second-largest debt, at about 120 percent of gross domestic product.
Spain’s rating, which was AAA until 2010, has now been lowered twice by Fitch as the deepest austerity measures in three decades fail to convince investors the nation can stem the surge in its debt burden. Moody’s also warned “all but the strongest euro-area sovereigns” are likely to see further downgrades, when it cut Italy’s rating for the first time in almost two decades.
Fitch said it expects Spanish growth to remain below 2 percent a year through 2015. Still, the nation’s debt burden will peak at 72 percent of GDP in 2013, below the forecast for the euro area on average, the company said.
Italy gave final approval last month to a 54 billion-euro ($72 billion) austerity plan aimed at balancing the budget in 2013 that convinced the ECB to start buying the nation’s and Spanish bonds on Aug. 8. Italy’s 10-year borrowing costs, which fell as low as 4.87 percent on Aug. 18, were at 5.52 percent yesterday. Spain’s 10-year bond yield was at 4.99 percent.
“The crisis has adversely impacted financial stability and growth prospects across the region,” Fitch said. “However, the high level of public debt and fiscal financing requirement along with the low rate of potential growth rendered Italy especially vulnerable to such an external shock.”
The decision also comes after Standard & Poor’s stripped the U.S. of its AAA credit rating for the first time. While the Aug. 5 move roiled global markets, bond investors ignored S&P’s warnings about U.S. creditworthiness and piled into Treasuries. The yield on the benchmark U.S. government bond fell to a record 1.6714 on Sept. 23.
Spain’s Socialist government, which faces a general election on Nov. 20, has said the country may miss its 2011 growth forecast of 1.3 percent as the recovery slows. Unemployment remains above 21 percent and the manufacturing industry contracted the most in more than two years in September. Regional governments, which are responsible for health and education and hire half of Spain’s public workers, are behind schedule to meet their deficit targets, preliminary data showed on Sept. 8.
The People’s Party, which polls indicate may win an outright majority in the vote, has pledged a stricter budget law, spending limits for the regional governments, and tax breaks to encourage companies to hire workers and become more competitive. PP leader Mariano Rajoy said on Sept. 15 he would send a “strong signal” to markets and wouldn’t deviate from the budget-deficit goal of 4.4 percent of gross domestic product in 2012 “under any circumstances.”
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