The credit ratings of Italy, Spain and three other euro-area countries were cut by Fitch Ratings, which said the five nations lack financing flexibility in the face of the regional debt crisis.
Italy, the euro area’s third-largest economy, was cut two levels to “A-” from “A+.” The rating on Spain was also lowered two notches, to “A” from “AA-.” Ratings on Belgium, Slovenia and Cyprus were also reduced, while Ireland’s rating was maintained.
The downgrades, flagged a month ago by Fitch, come as Greece negotiates with creditors on how to avoid a default and other euro nations struggle to bolster the region’s defenses against contagion should those talks fail. While sovereign-bond yields have fallen in Italy and Spain has seen an influx of liquidity from the European Central Bank in recent weeks, the countries downgraded on Friday still lack financial flexibility, Fitch said.
“The divergence in monetary and credit conditions across the eurozone and near-term economic outlook highlight the greater vulnerability” these nations face in the event of financing shocks, Fitch said. “These sovereigns do not, in Fitch’s view, accrue the full benefits of the euro’s reserve- currency status.”
Belgium’s rating was cut to “AA” from “AA+,” while that of Cyprus was pared to “BBB-” from “BBB.” Slovenia was downgraded to “A” from “AA-.” Ireland’s long-term rating was maintained at “BBB+.”
All the countries were removed from “ratings watch negative,” though they retain a “negative outlook,” which implies the possibility of a downgrade within two years, according to Fitch.
US Treasury Secretary Timothy Geithner warned European leaders in Davos, Switzerland, on Friday that the US isn’t willing to provide more support for the region unless its own governments act first.
“The only way Europe’s going to be successful in holding this together, making monetary union work, is to build a stronger firewall,” Geithner said at the annual meeting. “That’s going to require a bigger commitment of resources.”
European leaders gather in Brussels tomorrow to discuss Greece, regional support mechanisms and how to spur growth.
Fitch placed Spain, Italy, Ireland, Cyprus, Belgium and Slovenia on review on Dec. 16 for possible downgrades, citing Europe’s failure to find a “comprehensive solution” to the region’s crisis. Fitch lowered the outlook on France’s “AAA” rating at the same time, though the company said earlier this month that France’s rating probably wouldn’t be cut this year.
“This was in the pipeline,” said Thomas Costerg, an economist at Standard Chartered Bank in London. “The important thing is that the ratings of Italy and Spain remain on par or above S&P’s, so this is catch-up. It’s definitely a wake-up call for European leaders ahead of the summit.”
Italy’s credit rating was cut two levels to “BBB+” last week by Standard & Poor’s (S&P), which also downgraded eight other euro-region nations, including France and Austria, citing European leaders’ inability to contain the debt crisis.
However, the fallout in financial markets to S&P’s action was fairly muted.