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Spain, Italy Ratings Cut at DBRS as Debt Crisis Intensifies

Spain’s and Italy’s credit ratings were downgraded by DBRS Inc., which cited a weakening growth outlook in the countries and deteriorating funding conditions.

Spain was cut two steps to A (low) from A (high) and Italy was downgraded one level to A, the Toronto-based company said today in a statement. Ireland’s grade was confirmed at A (low), four steps from junk.

Italy faces “persistent stress in market-funding conditions and rising systemic risks,” and financing conditions also pose a threat to Spain’s growth outlook, DBRS said. Doubts about the euro area’s policy response to the crisis contributed to both downgrades, it said.

DBRS is one of the four companies accepted by the European Central Bank to rate the securities it takes as collateral. The downgrades add to pressure on Italy and Spain, which are fighting to avoid needing international rescues as their borrowing costs have surged to record levels.

Spain’s 10-year bond yield rose to 6.867 percent today, compared with 6.86 percent yesterday and a euro-era intraday record of 7.75 percent on July 25. Italian yields of a similar maturity declined to 5.897 percent from 5.971 percent yesterday.

Debt Burden

Spain’s debt may rise to 97 percent of gross domestic product by 2015 if the nation uses the full 100 billion euros ($124 billion) available in Europe’s bailout of Spanish banks, DBRS said. The ratio was 69 percent last year. Italy’s debt-to-GDP ratio may peak at 123 percent in 2012, compared with 120 percent last year.

“The evolution of debt-to-GDP is most important for the stability of these ratings,” Fergus McCormick, the New York-based head of sovereign ratings at DBRS, said in a telephone interview.

The central bank has suspended the minimum credit-rating threshold for Greece, Ireland and Portugal after they applied for international bailouts, saying policy makers have confidence in those countries implementing the fiscal reforms they agreed on.

While Cypriot bonds have become ineligible as collateral in refinancing operations, the ECB accepts bonds of all other euro members as long as one company rates them as investment grade. The other three companies are Standard & Poor’s, Fitch Ratings, and Moody’s Investors Service.

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