FRANKFURT, Germany (AP) ― U.S. ratings agency Fitch says it is downgrading the credit ratings of five countries that use the euro, including economic heavyweights Italy and Spain.
The downgraded countries ― also including Belgium, Cyprus, and Slovenia ― faced financial and economic difficulites due to the eurozone’s debt crisis that could make it harder for them to repay their debts, Fitch said Friday after financial markets closed in Europe.
The move by Fitch was largely expected, as the agency had said it was reviewing the countries’ ratings. It was nonetheless another setback to European leaders’ efforts to contain a crisis over too much government debt in some of the 17 countries that use the euro.
The crisis-hit countries have seen a steep rise in the interest rates investors demand before they will buy their bonds. Those added costs increase investor fears of a default on their debt repayments and can create a spiral of higher interest rates that eventually leads to a default.
Ireland, Greece and Portugal have been cut off from bond market borrowing by fears that they might default, and have had to take bailout loans from other eurozone governments and the International Monetary Fund.
Fitch on Friday lowered ratings for the five countries by one notch and placed a negative outlook on all of them. Italy went down to “A-” credit rating while Spain was downgraded to “A.” Additionally, a sixth country, Ireland, saw its “BBB+” rating affirmed but it also received a negative outlook.
The downgrade by Fitch carried a warning for Italy, a recent focus of the crisis because of its 1.9 trillion euros ($2.5 trillion) in debt and sluggish, bureaucracy-choked economy.
The agency said the third-largest eurozone economy would face permanently higher borrowing costs that would make it harder to keep its debt under control. More severe ratings action was only fended off by the “strong commitment” of the new Italian government under Prime Minister Mario Monti to balance the country’s budget and make Italy a better place to do business.
Fitch’s decision comes on top of a similar move on nine eurozone nations by another ratings agency, Standard & Poor’s, on Jan. 13. Since the S&P downgrade, however, the borrowing costs of several countries that had been downgraded have actually gone down, reflecting a recovery in investor confidence in those countries’ economic policies and moves by the European Central Bank late last year to lend banks unlimited amounts of money at low interest rates to stabilize them.
Fitch, nonetheless, cited the European Union’s slow-moving approach to fundamental reform of how the euro currency is set up, as a major reason for its decision ― as well as the lack in the interim of a credible financial “firewall” to protect countries that suddenly have trouble borrowing from defaulting.
Fitch blamed the revisions on “the marked deterioration in the economic outlook” in Europe and “the absence of a credible financial firewall against contagion and self-fulfilling liquidity crises.”
It said that European leaders “gradualist” approach to tackling the crisis meant that Europe will continue to face episodes of severe financial volatility that would erode government’s ability to repay debt.
European leaders have been criticized for moving too slowly in tackling the crisis, which started in October 2009 when Greece admitted it was in deep financial trouble. Led by Germany, the eurozone’s largest member, governments have resisted sweeping solutions such as pooling their borrowing power in so-called eurobonds and have balked at increasing the financing of their bailout funds from 500 billion euros. Efforts have focused instead on making bailed-out countries try to cut spending and reduce their budget deficits. The 17 members have also agreed to come up with a treaty requiring national laws to limit deficits.
At the World Economic Forum gathering in Davos this week, leading European finance chiefs have sought to reassure anxious global business leaders that Europe is on track to solve its debt crisis.
Fitch said the eurozone’s difficulties would be compounded by a shrinking economy, now that many economists expect at least a mild recession.
“The eurozone crisis will only be resolved as and when there is broad economic recovery,” Fitch said. “It is evident that further substantial reforms of the governance of the eurozone will be required to secure economic and financial stability, including greater fiscal integration.”
Greece is currently locked talks to placate its creditors, seeking to secure a crucial debt relief deal with private investors while also tackling pressing demands from its European partners and the IMF for deeper reforms.
Failure on either front would force the recession-bound country to default on its debt in less than two months, pouring new fuel on the fires of Europe’s debt crisis.
