Fitch Cuts Italy Rating to A+; Cuts Spain Rating to AA-
Fitch Ratings just downgraded its long-term IDR rating on Italy from 'AA-' to 'A+', outlook Negative. Short-term ratin lowered from 'F1+' to 'F1'.
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. As Fitch has cautioned previously, 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. In the meantime, the crisis has adversely impacted financial stability and growth prospects across the region. However, 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.
While the recent supplementary budget substantially strengthened the fiscal consolidation effort, the initially hesitant response by the Italian government to the spread of contagion has also eroded market confidence in its capacity to effectively navigate Italy through the Eurozone crisis.
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. As a sovereign and nation it is solvent. Moreover, as the third largest economy in the euro zone, Italy is a 'core' member of EMU and the rating incorporates Fitch's judgement that, in extremis, the ECB and/or EFSF/IMF will provide support to prevent a self-fulfilling liquidity crisis.
The firm also (minutes after) reduced the long-term IDR on Spain from 'AA+' to 'AA-', outlook Negative. The short-term rating was affirmed at 'F1+'.
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.
As Fitch has previously cautioned, 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. In the meantime, the crisis has adversely impacted financial stability and growth prospects across the region. However, the still sizeable structural budget deficit, high level of net (although not
gross) external debt and the fragility of the economic recovery as the process of deleveraging and rebalancing continues render Spain especially vulnerable to such an external shock.
While gross external debt (169% of GDP in 2010) is not high by euro area comparison, the net external debt of the economy (91% of GDP in 2010) is one of the highest in the world, reflecting a relative lack of Spanish foreign financial assets. This leaves the Spanish external finances sensitive to interest rate increases. While the current account adjustment has been significant, falling from 10% of GDP in 2007 to 4.5% of GDP in 2010 and a forecast 3.2% in 2011, further adjustment over the medium is necessary to improve the external balance sheet.
The intensification of the euro area crisis was identified as a negative rating trigger on 4 March 2011 when Spain's rating Outlook was revised to Negative.
With large fiscal and external financing needs, heightened volatility has adversely impacted market financing conditions for Spain as illustrated by the Eurosystem's intervention in the secondary market. However, Spain's 'AA-' rating incorporates Fitch's judgement that as a solvent and systemically important sovereign, in extremis, the ECB and/or EFSF/IMF will provide support to prevent a self-fulfilling liquidity crisis.
The second principal driver of the downgrade of Spain's sovereign ratings is the budgetary performance of some regional governments, which in Fitch's opinion, poses a risk to fiscal consolidation. In September 2011, the agency downgraded five autonomous communities and maintains a Negative Outlook on the sector reflecting the still difficult fiscal and economic environment and the execution risks in implementing some of the cost cutting measures announced. While the sub-national sector's debt was only 11.1% of GDP in 2010, it accounts for roughly one-third of total expenditure, making it a vital part of the necessary correction in the public finances to restore confidence and public debt sustainability.
The process of rebalancing the Spanish economy is well underway but is not yet complete and Fitch expects it to weigh more heavily on economic growth over the medium term. The agency projects annual economic growth to remain below 2% through to 2015 and unemployment to remain high. Despite the important measures already adopted by the government, further structural reform will be necessary to further enhance the competitiveness and productivity of the economy. The fundamental weakness of the labour market, as underscored by an unemployment rate in excess of 20%, is a material rating weakness relative to European and high-grade peers. Nonetheless, while the recovery over the medium term will be lacklustre, Fitch expects the long-term (ie, post-2015) potential growth rate to exceed the average for the euro area as a whole.
Despite the weakened risk profile, Fitch views Spanish sovereign solvency as secure. Under the agency's baseline scenario, the debt to GDP ratio will peak at 72% of GDP in 2013, well below the forecast euro area average of 89% in 2013.
Spain's 'AA-' rating reflects strong fundamentals: a diversified, high-value-added economy and strong governance. The government's policy response has been credible and aggressive.
The Negative Outlook reflects the risks associated with a further intensification of the euro area financial crisis, as well as possible material fiscal slippage and to a lesser extent contingent liabilities from the financial sector. A material deviation from the government's fiscal targets and failure to stabilise the government debt to GDP ratio from 2013 would place negative pressure on the rating. Substantial progress has been made in the restructuring of the banking sector and Fitch has not revised its estimate of the ultimate fiscal cost which is moderate and is consistent with the current rating.
Get immediate access to market moving news and alerts with StreetInsider.com Premium - FREE TRIAL!
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. As Fitch has cautioned previously, 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. In the meantime, the crisis has adversely impacted financial stability and growth prospects across the region. However, 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.
While the recent supplementary budget substantially strengthened the fiscal consolidation effort, the initially hesitant response by the Italian government to the spread of contagion has also eroded market confidence in its capacity to effectively navigate Italy through the Eurozone crisis.
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. As a sovereign and nation it is solvent. Moreover, as the third largest economy in the euro zone, Italy is a 'core' member of EMU and the rating incorporates Fitch's judgement that, in extremis, the ECB and/or EFSF/IMF will provide support to prevent a self-fulfilling liquidity crisis.
The firm also (minutes after) reduced the long-term IDR on Spain from 'AA+' to 'AA-', outlook Negative. The short-term rating was affirmed at 'F1+'.
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.
As Fitch has previously cautioned, 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. In the meantime, the crisis has adversely impacted financial stability and growth prospects across the region. However, the still sizeable structural budget deficit, high level of net (although not
gross) external debt and the fragility of the economic recovery as the process of deleveraging and rebalancing continues render Spain especially vulnerable to such an external shock.
While gross external debt (169% of GDP in 2010) is not high by euro area comparison, the net external debt of the economy (91% of GDP in 2010) is one of the highest in the world, reflecting a relative lack of Spanish foreign financial assets. This leaves the Spanish external finances sensitive to interest rate increases. While the current account adjustment has been significant, falling from 10% of GDP in 2007 to 4.5% of GDP in 2010 and a forecast 3.2% in 2011, further adjustment over the medium is necessary to improve the external balance sheet.
The intensification of the euro area crisis was identified as a negative rating trigger on 4 March 2011 when Spain's rating Outlook was revised to Negative.
With large fiscal and external financing needs, heightened volatility has adversely impacted market financing conditions for Spain as illustrated by the Eurosystem's intervention in the secondary market. However, Spain's 'AA-' rating incorporates Fitch's judgement that as a solvent and systemically important sovereign, in extremis, the ECB and/or EFSF/IMF will provide support to prevent a self-fulfilling liquidity crisis.
The second principal driver of the downgrade of Spain's sovereign ratings is the budgetary performance of some regional governments, which in Fitch's opinion, poses a risk to fiscal consolidation. In September 2011, the agency downgraded five autonomous communities and maintains a Negative Outlook on the sector reflecting the still difficult fiscal and economic environment and the execution risks in implementing some of the cost cutting measures announced. While the sub-national sector's debt was only 11.1% of GDP in 2010, it accounts for roughly one-third of total expenditure, making it a vital part of the necessary correction in the public finances to restore confidence and public debt sustainability.
The process of rebalancing the Spanish economy is well underway but is not yet complete and Fitch expects it to weigh more heavily on economic growth over the medium term. The agency projects annual economic growth to remain below 2% through to 2015 and unemployment to remain high. Despite the important measures already adopted by the government, further structural reform will be necessary to further enhance the competitiveness and productivity of the economy. The fundamental weakness of the labour market, as underscored by an unemployment rate in excess of 20%, is a material rating weakness relative to European and high-grade peers. Nonetheless, while the recovery over the medium term will be lacklustre, Fitch expects the long-term (ie, post-2015) potential growth rate to exceed the average for the euro area as a whole.
Despite the weakened risk profile, Fitch views Spanish sovereign solvency as secure. Under the agency's baseline scenario, the debt to GDP ratio will peak at 72% of GDP in 2013, well below the forecast euro area average of 89% in 2013.
Spain's 'AA-' rating reflects strong fundamentals: a diversified, high-value-added economy and strong governance. The government's policy response has been credible and aggressive.
The Negative Outlook reflects the risks associated with a further intensification of the euro area financial crisis, as well as possible material fiscal slippage and to a lesser extent contingent liabilities from the financial sector. A material deviation from the government's fiscal targets and failure to stabilise the government debt to GDP ratio from 2013 would place negative pressure on the rating. Substantial progress has been made in the restructuring of the banking sector and Fitch has not revised its estimate of the ultimate fiscal cost which is moderate and is consistent with the current rating.
Get immediate access to market moving news and alerts with StreetInsider.com Premium - FREE TRIAL!
You May Also Be Interested In
Create E-mail Alert Related Categories
Credit RatingsRelated Entities
Fitch RatingsSign up for StreetInsider Free!
Receive full access to all new and archived articles, unlimited portfolio tracking, e-mail alerts, custom newswires and RSS feeds - and more!
