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Fitch cuts Italy, Spain ratings over euro crisis

Fitch cut its credit ratings on Italy and Spain Friday, citing the increasing pressure on them as the eurozone debt crisis makes efforts to stabilise their public finances even more difficult.

The eurozone debt crisis has seen Greece, Ireland and Portugal all bailed out by the EU and International Monetary Fund to avert a potentially disastrous default which could threat not just the European but the global economy.

In recent months, Italy and Spain have been sucked into the storm as all three ratings agencies have cut their grades, sparking market turmoil and drawing the wrath of government officials who complain the move only adds insult to injury and makes their job much harder.

Lower sovereign credit ratings tend to push up countries’ borrowing costs, a major concern for those needing to raise fresh funding on nervous debt markets.

Fitch said it cut Italy’s credit rating by one notch to A+ from AA- with a negative outlook on Friday, following downgrades by Moody’s and Standard & Poor’s.

“The downgrade reflects the intensification of the euro zone crisis that constitutes a significant financial and economic shock which has weakened Italy’s sovereign risk profile,” Fitch said in a statement.

It said the outlook on Italy’s long-term ratings was negative, meaning that they could be downgraded further.

“A credible and comprehensive solution to the crisis is politically and technically complex and will take time to put in place and to earn the trust of investors,” Fitch said.

“The high level of public debt and fiscal financing requirement along with the low rate of potential growth rendered Italy especially vulnerable to such an external shock,” it added.

It said recent austerity measures had boosted fiscal consolidation but criticised “the initially hesitant response by the Italian government to the spread of contagion” from Europe’s debt crisis.

At the same time, Fitch stressed that “Italy’s sovereign credit profile remains relatively strong and is supported by a budgetary position that compares favourably to several European and high-grade peers.”

Fitch slashed Spain’s sovereign credit rating by two notches, blaming regional government spending, weak economic growth and the eurozone debt crisis.

“The downgrade primarily reflects two factors — the intensification of the euro area crisis and secondly, risks to the fiscal consolidation effort arising from the budgetary performance of some regions and downward revision by Fitch of Spain’s medium-term growth prospects,” it said.

The ratings agency said a comprehensive solution to the eurozone debt crisis “is politically and technically complex and will take time to put in place and to earn the trust of investors.

“In the meantime, the crisis has adversely impacted financial stability and growth prospects across the region.”

Fitch said Spain had a big long-term budget deficit, high net external debt and its recovery is fragile as companies try to lower debt levels, rendering it “especially vulnerable” to an external shock.

The Spanish economy slumped into recession during the second half of 2008 as the global financial meltdown compounded the collapse of a property bubble. It stabilised in 2010 but growth remains anaemic.

Fitch meanwhile affirmed its BBB- credit rating on Portugal, as reviewed the bailed-out country’s position.

Fitch said it would look at “official lending terms, Portugal’s performance to date under the EU-IMF programme, the 2012 budget, progress towards privatisation, risks to Portugal’s banking system and an updated assessment of Portugal’s medium-term economic and fiscal prospects”.