Fitch Downgrades Both Spain and Italy

Published on Saturday, 07 January 2012 19:11

Gavin

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Europe suffered a double shock today as Fitch ratings agency slashed the credit grades of Italy and Spain, both heavily indebted nations of the European Union. Spain had its rating cut by two notches while Italy was downgraded by one notch. Fitch cited the reason as the worsening of the European debt crisis and a high risk of default in both these countries. These countries are the third and fourth largest economies in the euro zone and Fitch has put both on a negative outlook, indicating that there might be further downgrades in the future.

Spanish long term default ratings were reduced from AA+ to AA- while similar Italian debt was downgraded from AA- to A+. Fitch also curtailed its growth estimate for Spain, stating that the growth will stay below 2 per cent for the next three years, and has put a negative outlook on Portugal, citing that it has yet to complete its evaluation in the fourth quarter.

The large public debt shouldered by these nations, combined with their low potential for growth in the next few years renders these nations very susceptible to blows from any external factors. Accordingly, these downgrades weren’t unexpected and it just reflects the European financial environment at the time.

Both these nations are highly involved in the current debt crisis in the region and are currently reliant on aid from the European Central Bank in terms of buying their bonds so as to keep the yields from rising up to unsustainable stages. Fitch said that the problem in Europe is very complex and will require careful manoeuvring to navigate out with the least damage.

This downgrade of Italy only follows similar ones by Standard and Poor’s and Moody’s in the past week this being another example that all the rating agencies tend to move in a herd.  The downgrade by Fitch doesn’t provide any new perspective in the whole affair.

Italy’s government has been hit by scandals and now is planning on bring in some new reforms next week, but with a weak hold on the parliament, it is highly improbable that the necessary strict reforms will be undertaken by the government. On the other hand, Spain’s socialist leadership has passed multiple austerity measures to reduce its budget deficit.

Following the cut, the dollar and the yen both ascended versus the euro.