Fitch Ratings may cut six euro-area countries currently on review by one or two levels by the end of this month, Managing Director Edward Parker said.
“We would expect the review will lead to downgrades of one to two notches for all the countries under review,” Parker said today in Milan.
Fitch placed Spain, Italy, Ireland, Cyprus, Belgium and Slovenia on review in December for possible downgrades, citing Europe’s failure to find a “comprehensive solution” to the region’s debt crisis. Fitch also lowered the outlook on France’s AAA rating at the same time, though executives this month said France’s rating would not likely be cut this year.
Parker said the risk of a breakup of the euro region was “very small” and that Fitch didn’t expect Italy to default on its 1.9 trillion-euro ($2.4 trillion) debt. The country is too big to be allowed to fail, he said. Prime Minister Mario Monti, who came to power in November, has been helping restore confidence in Italy, he said.
Italy is “absolutely critical to the euro zone future as a whole,” Parker said today. “The new government has to deliver on fiscal reforms and go ahead with reforms to increase growth. We’re quite encouraged by the steps that Monti’s government has made.”
Italy’s credit rating last week was cut two levels to BBB+ by Standard & Poor’s, which also downgraded eight other euro-region nations including top-rated France and Austria, citing the inability of European leaders to contain the region’s debt crisis.
The fallout in financial markets has been muted. Spain yesterday paid an average 2.049 percent to sell 12-month debt, compared with 4.05 percent on Dec. 13. The previous day, France auctioned 1.895 billion euros of one-year notes at a yield of 0.406 percent, down from 0.454 percent on Jan. 9.
Italy’s 10-year bond has gained in the three days since the S&P decision and the yield has declined 23 basis points to a five-week low of 6.392 percent.
Fitch also expects Greece to default even if the country manages to successfully complete an agreement with private investors to accept a writedown of their Greek debt.
“We do expect Greece to default as it has an unsustainable debt, the question is how,” Parker said. “The private sector involvement voluntary scheme would be a default as well. The key issue is to avoid the disorderly default.”