Fitch Cuts Spain, Italy Credit Ratings; Outlooks Negative

Spain and Italy, the euro region’s fourth- and third-largest economies, were downgraded by Fitch Ratings on concern they will struggle to improve their finances as Europe’s debt crisis intensifies.

Spain had its foreign and local currency long-term issuer default ratings cut to AA- from AA+, while Italy had the same set of ratings lowered to A+ from AA-, Fitch said in statements today. The outlook for both countries is negative. Fitch also maintained Portugal’s rating at BBB-, saying it would complete a review of that ranking in the fourth quarter.

Belgium had its Aa1 local and foreign currency government bond ratings placed on review for possible downgrade by Moody’s Investors Service, which cited the financing environment for euro sovereigns and increasing risks to economic growth.

The downgrades for Spain and Italy reflect “the intensification of the euro zone crisis,” Fitch said, citing risks to Spain’s “fiscal-consolidation” efforts. “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.”

Spain and Italy are scrambling to avoid the fallout from the debt crisis as Greece moves closer to default. Borrowing costs for both nations surged to euro-era record highs in August, prompting the European Central Bank to prop up their bonds on the secondary market.

International Credibility

“There are two things Italy needs to do. One is to work on reacquiring a sufficient level of international credibility to maintain its financial house in order,” Fiat SpA (F) Chief Executive Officer Sergio Marchionne said after a speech in Montreal today. “The other thing that you need is to increase the purchasing capability of the Italian public.”

Fitch’s cut of Italy was its first since October 2006. It follows downgrades of Italy by Moody’s Investors Service on Oct. 4 and Standard & Poor’s on Sept. 19, which both cited concerns that the country’s weak economic growth means it will struggle to reduce Europe’s second-largest debt, at about 120 percent of gross domestic product.

Spain’s rating, which was AAA until 2010, has now been lowered twice by Fitch as the deepest austerity measures in three decades fail to convince investors the nation can stem the surge in its debt burden. Moody’s also warned “all but the strongest euro-area sovereigns” are likely to see further downgrades, when it cut Italy’s rating for the first time in almost two decades.(more)