Bloomberg News

Fitch Cuts Italy’s Credit Rating, Citing Adverse Debt Dynamics

January 29, 2012

(See EXT4 <GO> for more on the European debt crisis.)

Jan. 27 (Bloomberg) -- Italy’s credit rating was cut two levels by Fitch Ratings, which cited the impact of a surge in borrowing costs on the nation’s debt, the second-biggest in the euro region.

Fitch lowered Italy’s rating to A- from A+, the nation’s second downgrade by the rating company since Oct. 7. Fitch also cut the ratings of Belgium, Cyprus, Spain and Slovenia, while Ireland had its rating affirmed. The outlook on all six is negative, according to an e-mailed statement today.

Euro-region governments face financing risks “in the absence of a credible financial firewall against contagion and self-fulfilling liquidity crises,” Fitch said. Italy is grappling with “an adverse shift in the interest-rate growth differential and hence public debt dynamics.”

David Riley, head of the sovereign-debt unit at Fitch Ratings, said in Paris on Jan. 12 that Italy faces a “self- fulfilling liquidity crisis” without more assistance from the European Central Bank. Fitch warned on Dec. 16 that by February it may cut the ratings of euro-area nations rated below AAA as the debt crisis defies the “comprehensive solution” pledged by European Union leaders.

Piling on Pressure

The decision increases pressure on Prime Minister Mario Monti to show he can implement a 30 billion-euro ($39.5 billion) plan of budget cuts and growth measures passed by Parliament in December to curb record borrowing costs and avoid a default. To kick-start the economy, the government last week passed a second plan to boost competition and growth by opening so-called closed professions, including notaries, lawyers and taxi drivers.

After surging to record highs late last year, Italy’s borrowing costs have fallen after the ECB last month loaned almost half a trillion euros for three years to euro-region banks to avert a credit crisis. Italy’s 10-year bond yielded 5.898 percent today, the lowest since Oct. 11.

Italy may be in its fourth recession since 2001, after the country’s growth averaged 0.2 percent annually in the decade to 2010, compared with 1.1 percent in the euro area. The International Monetary Fund forecast on Jan. 24 that the economy will shrink 2.2 percent this year, compared with a 0.5 percent contraction for the euro area.

“Today’s rating actions balance the marked deterioration in the economic outlook with both the substantive policy initiatives at the national level to address macro-financial and fiscal imbalances, and the initial success of the ECB’s three- year Long-Term Refinancing Operation in easing near-term sovereign and bank funding pressures,” Fitch said.

--Editors: Jeffrey Donovan, Fergal O’Brien

To contact the reporter on this story: Chiara Vasarri in Rome at cvasarri@bloomberg.net

To contact the editor responsible for this story: Jerrold Colten at jcolten@bloomberg.net


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