Bloomberg News

Europeans Won’t Let Italy Default, DBRS Chairman Schroeder Says

October 13, 2011

Oct. 13 (Bloomberg) -- European Union leaders are determined to support Italy even if they let Greece default on its debt, said Walter Schroeder, chairman of Toronto-based credit-ratings company DBRS Ltd.

Italian Prime Minister Silvio Berlusconi called today for a confidence vote in parliament to prove he has enough support to rule after failing to muster a majority on a legislative ballot this week. The prime minister is struggling to convince investors he can cut Europe’s second-biggest debt load. Italy has been downgraded by Moody’s Investors Service, Standard & Poor’s and Fitch Ratings in the past month even after approving 54 billion euros ($74.4 billion) in austerity measures.

“They’re not going to allow Italy to fail,” Schroeder said at a presentation to investors in Montreal yesterday. “Whatever has to be done will be done. They’re not going to allow France or any of other country like Spain to fail. They are going to create whatever currency, do whatever they have to do. They will rescue these countries. They can’t afford to let them go.”

German banks are preparing for losses of as much as 60 percent on their Greek government debt holdings as European officials push for more private-investor involvement in a rescue of the debt-stricken country, people with knowledge of the matter said today. Luxembourg’s Jean-Claude Juncker, who heads the group of euro-area finance ministers, said that talks are under way on the cost to investors of a second bailout package for Greece.

Ratings Risk

“In the case of the big sovereigns, there may be a restructuring in Greece, with a haircut of 50 cents,” Schroeder said. DBRS doesn’t rate Greece and rates Italy as investment grade at AA (Low).

Euro zone countries today account for as much as 95 percent of all risks to ratings because of the potential consequences of sovereign defaults on global banks, Schroeder said.

“The biggest risk is Europe and the euro,” he said. “I think the European Central Bank is going to help out, it’s a matter of time. What they need is a good crisis, but they haven’t reached it yet. That will probably happen eventually, and I am sure they will do the right thing.”

DBRS isn’t planning to cut its ratings on European sovereign governments because some countries have already announced measures to cut spending and rein in deficits, Schroeder said. On Aug. 17, DBRS cut Ireland’s long-term foreign and local currency debt was downgraded to A (Low) from A because of deteriorating growth prospects for the nation’s economy.

“Our philosophy is: cut if there’s a structural problem, confirm if it’s cyclical,” Schroeder said. “We’re not going to cut excessively for short-term aberrations. We’ve been holding our rating on some of the European countries on the basis that steps are being taken and they are on the road to recovery in some cases. It’s going to take maybe two, three or four years but we are reluctant to cut just for headline news.”

--Editors: Dave Liedtka, Paul Cox

To contact the reporter for this story: Frederic Tomesco in Montreal at tomesco@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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