Bloomberg News

France’s AAA Outlook Cut as Fitch Reviews Italy, Spain

December 19, 2011

(Updates with comment from ECB’s Liikanen in seventh, eighth paragraphs. For more on Europe’s debt crisis, see EXT4.)

Dec. 17 (Bloomberg) -- France’s credit outlook was lowered by Fitch Ratings, which also put the grades of nations including Spain and Italy on review for a downgrade, citing Europe’s failure to find a “comprehensive solution” to the debt crisis.

Fitch affirmed France’s AAA rating and placed Spain, Italy, Belgium, Slovenia, Ireland and Cyprus on a “Rating Watch Negative” review, which it expects to complete by the end of January, according to a statement released yesterday in London. Separately, Belgium’s credit rating was cut two levels to Aa3 yesterday by Moody’s Investors Service.

The move by Fitch increases pressure on the region’s leaders to end a two-year debt crisis that has seen bailouts of Greece, Ireland and Portugal. European Union leaders meeting this month in Brussels agreed to forge a tighter fiscal union as the thrust of their efforts, even as the European Central Bank resisted investor calls to ramp up its bond-buying program.

“Of particular concern is the absence of a credible financial backstop,” Fitch said in an e-mailed statement. “This requires more active and explicit commitment from the ECB.”

Without a full solution, Fitch said the crisis will persist, “punctuated by episodes of severe financial-market volatility that is a particular source of risk to the sovereign governments of those countries with levels of public debt, contingent liabilities and fiscal and financial sector financing needs that are high relative to rating peers.”

S&P Action

Fitch’s action follows reviews announced by Standard & Poor’s and Moody’s. S&P on Dec. 5 placed the ratings of 15 euro nations on review for possible downgrade, including the region’s six AAA rated countries. Moody’s had said Dec. 12 it will review the ratings of all euro countries in the first quarter of 2012 because the Dec. 9 EU summit didn’t produce “decisive policy measures” to end the debt turmoil.

Credit rating companies are quick during an economic boom to give ratings that are too high, and “during the downturn they may exaggerate in the other direction,” ECB council member Erkki Liikanen said in an interview on Finland’s YLE TV1 today.

Still, governments should “take care of finances in a way that doesn’t leave them at the mercy of the markets,” Liikanen said. “It would be best to act early so one doesn’t have to react to market surprises.”

The euro gained 0.2 percent to $1.3046 at in New York yesterday, after rising as much as 0.5 percent. It fell 2.5 percent this week, the biggest such decline since the five-day period ended Sept. 9.

‘Factored In’

Fitch’s decision “has been already factored in” by investors, said Jay Bryson, global economist for Wells Fargo Securities in Charlotte, North Carolina. “I would think that if it were a surprise there would have been a larger financial market reaction.”

“It’s justified,” said Vincent Truglia, managing director at New York-based Granite Springs Asset Management LLP and a former head of the sovereign risk unit at Moody’s. “A solution to the crisis that maintains the euro as it is, is not tenable,” he said. “The euro must be shrunk dramatically.”

A so-called ratings watch indicates a heightened probability of a rating change. Ratings outlooks show the direction a rating is likely to move over a one- or two-year period. A negative outlook indicates a “slightly greater than 50 percent chance of a downgrade over a two-year horizon,” Fitch said in its statement on France.

‘Heightened Risk’

Fitch said it changed France’s outlook because of the “heightened risk of contingent liabilities” that may emerge from the escalating euro-region crisis. The country has almost run out of buffers to absorb shocks “without undermining its AAA status,” it said.

“The intensification of the euro zone crisis since July constitutes a significant negative shock to the region and to France’s economy and the stability of its financial sector,” the company said.

France’s government is “determined to follow its actions for growth” and “in the reduction of the public deficit,” Finance Minister Francois Baroin said in an e-mailed statement after the Fitch announcement.

EU leaders agreed to forge a tighter fiscal union, shore up the region’s bailout funds and tighten rules to curb future debts at the summit. The same week, ECB President Mario Draghi signaled that the Frankfurt-based bank wouldn’t step up its purchases of sovereign bonds, and instead expanded its liquidity measures for banks.

‘Paradigm Shift’

“This marks the beginning of a deep paradigm shift about the euro area, especially the implied underlying assumption of intra-EMU solidarity and ECB assistance,” said Thomas Costerg, an economist at Standard Chartered Bank in London. “They now have to show that EMU is not an emperor without clothes.”

Moody’s cut Belgium’s rating two levels to Aa3 and said rising borrowing costs, slowing growth and liabilities arising from Dexia SA’s breakup threaten to inflate the euro area’s fifth-highest debt load.

Moody’s lowered Belgium’s debt rating to the fourth-highest investment grade, from Aa1, with a negative outlook, the ratings company said yesterday in a statement. The action follows S&P’s one-step downgrade of Belgium to AA on Nov. 25. Fitch Ratings put Belgium’s AA+ on review for a downgrade yesterday.

--With assistance from Matthew Brown in London and Ian Katz in Washington. Editors: Christopher Wellisz, Vidya Root

To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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