Riley Says There’s a ‘Significant Chance’ Italy Rating to Fall

Italy faces a “significant chance” of a downgrade by Fitch Ratings, which is reviewing all European sovereigns and will make a decision by the end of the month.

“Taking out the crisis premium means a credible firewall,” David Riley, head of the sovereign-debt unit at Fitch, said at a conference today in London. “At the moment, we don’t have that, and that’s a serious concern with respect to Italy.”

German Chancellor Angela Merkel and French President Nicolas Sarkozy met yesterday before a European summit at the end of the month as leaders try to flesh out their latest plan to end the debt turmoil. Merkel will meet with International Monetary Fund Managing Director Christine Lagarde in Berlin today, where she said that Greece will be the focus of talks.

Riley said that IMF’s program for Greece “doesn’t seem to be working.” Greek creditors agreed to a 50 percent writedown on their debt holdings last year as part of a new bailout package for the country.

Greece’s economy “is contracting” while the point of the bailout program was to promote growth, he said. Ireland, which also received a bailout, “has been more favorably viewed” as “people can actually see that potentially Ireland can grow its way out of this crisis.”

Bond Yields

Italian bonds rose today, with the yield on the nation’s 10-year debt slipping 4 basis points to 7.12 percent as of 10:30 a.m. in London. Still, it remains above the 7 percent level that forced Greece, Ireland and Portugal to seek international aid. Greek bond yields slipped 17 basis points to 35.5 percent.

Fitch is unlikely to cut France’s credit rating this year, Reuters reported, citing Ed Parker, head of Europe, Middle East and Africa sovereign ratings. The ratings company lowered the nation’s credit outlook last month and put countries including Spain and Italy on review for a downgrade, citing Europe’s failure to find a “comprehensive solution” to the debt crisis.

In a report published today, Fitch forecast a “shallow recession” in the 17-nation euro area this year “as tough austerity measures continue to bite and consumer and business confidence remains weak.”

“The risk of a vicious cycle of stagnating economies fueling worries over the solvency of some governments and banks is a real one,” Riley said in the report. “More positively, the unwinding of the imbalances that led to the crisis is well underway and the headwinds from deleveraging and austerity should begin to ease toward the end of the year.”

To contact the reporters on this story: Jennifer Ryan in London at jryan13@bloomberg.net; Svenja O’Donnell in London at sodonnell@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net