Rome: The Fitch agency downgraded its sovereign credit rating for Italy and Spain on Friday and said its long-term outlook for both countries was negative, citing high debt and poor prospects for growth.
Separately, Fitch also said it was keeping Portugal’s debt rating on watch for a possible downgrade, with a decision due by the end of the year. Portugal was the third and latest eurozone country to receive an international bailout package after Greece and Ireland.
The reports are a blow to Europe’s hopes of containing the debt crisis that has already seen three countries bailed out. Italy and Spain have the eurozone’s third and fourth largest economies and are widely considered too expensive to rescue.
Fitch downgraded Italy’s creditworthiness from AA- to A+, citing high public debt, low growth and the “politically technical and complex” solution necessary to fix Italy’s financial ills and earn back the trust of investors.
While saying Italy’s recent austerity measures improved its standing, “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,” Fitch said.
The move came after Moody’s Investors Service on Tuesday downgraded Italy’s bond ratings to A2 with a negative outlook from Aa2.
On 19 September, Standard & Poor’s cut Italy’s long-and short-term sovereign credit ratings one notch, though its rating is still five steps above junk status.
Despite the downgrade, Fitch said Italy’s sovereign credit profile remains “relatively strong” and that its budget position compares favourably to other European countries. Also Friday, Fitch cut Spain’s sovereign debt rating by two notches to AA- from AA+, citing increased risks from the eurozone financial crisis as well as high debt in regional governments and weakening growth prospects.
Like Italy, Fitch kept a negative outlook on Spain, but said it expected the country to remain solvent. It says that debt reduction efforts will weigh on growth and keep unemployment high.