AAA Euro Nations at Risk as Crises Worsens, Fitch Says

Sovereign credit ratings inside the euro area, including those of AAA nations, risk downgrades as policy makers fail to demonstrate they can end the region’s debt crisis, according to Fitch Ratings.

Ratings in the currency bloc are under “strong downward pressure,” Fitch Managing Director Ed Parker said at an event in Oslo today. If there’s “no light at the end of the tunnel soon,” the risk of a breakup of the 17-member euro area will rise, he said. Policy makers are likely to continue “muddling through” and the “last minute” solutions are raising the cost of managing the crisis, he said.

Euro-zone leaders presented the bloc’s fourth bailout at the weekend as Spain sought as much as 100 billion euros ($125 billion) to rescue its banks. The deal was pieced together ahead of June 17 elections in Greece that may result in Europe’s most indebted nation exiting the currency bloc as anti-austerity parties rail against bailout terms.

Yields on debt sold by Spain, Italy and Greece rose today. Spain’s 5.85 percent note due 2022 sank as the yield jumped 14 basis points to 6.65 percent. Borrowing costs on similar- maturity Italian notes rose 10 basis points to 6.13 percent. German 10-year yields gained eight basis points to 1.38 percent.

‘Positive Step’

“We have done an assessment of the recapitalization needs of the Spanish banking sector and we think, in our base case, we need 50 billion euros to 60 billion euros,” Parker said in an interview after his prepared comments. “In a stressed, kind of Irish severe stress test,” the figure might be as high as 90 billion euros to 100 billion euros, he said. “So the package that was announced on the weekend is sufficient for that assessment. We see it as a positive step that can help to stabilize things.”

The “key concern” remains the risk of contagion should Greece exit the euro, Parker said. While the direct impact of the nation’s departure would be small, a disorderly exit could also hurt the ratings of the euro region’s AAA rated nations, he said. There is “huge” uncertainty about the fate of Greece, Parker said.

Only four euro nations -- Germany, Luxembourg, Finland and the Netherlands -- still carry the top AAA credit grade at the three main ratings companies. Fitch rates Spain BBB, while it puts Italy’s long-term debt at A-.

Italy Vs Spain

Spain, which said June 9 there are no fiscal terms attached to its bailout, will fail to meet its budget deficit targets this year and next, Parker said, adding to a backlash against more bailout spending that is gaining traction in core countries such as Germany and Finland.

Italy is unlikely to need external support, Parker said.

“Italy is much closer to getting to a sustainable macro- economic position,” Parker said in the interview. “It is now running a pretty small budget deficit, has a much lower current account deficit, doesn’t have these problems in the banking sector.”

Italy will bring its budget deficit to 2 percent of gross domestic product this year, the European Commission estimates. That compares with a 6.4 percent shortfall in Spain. Spanish debt will be 80.9 percent of GDP in 2012, compared with Italy’s 124 percent, according to the commission. Greece will post a 7.3 percent deficit on debt of 161 percent of GDP, the commission said.

Still, “Italy does have high levels of government debt so there is very little headroom there to absorb any further negative shocks,” Parker warned.

ECB Cash

A Greek exit from the euro area would also make a third offering of three-year loans from the European Central Bank “inevitable,” Fitch Co-Head of Financial Institution Ratings James Longsdon said at the same event today. More long-term liquidity support from the ECB is growing “increasingly likely,” he said.

The ECB channeled more than $1 trillion into Europe’s banks in December and February to help prop up bond markets. Though the loans initially showed signs of helping to stabilize the region, Spanish and Italian bond yields have since resumed their ascent.

To contact the reporter on this story: Josiane Kremer in Oslo at jkremer4@bloomberg.net

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net

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