Fitch Downgrades Spain, Italy on "Intensification of Euro Zone Crisis"; Outlook Negative; Greek 1-Year Bond Yield Hits 144%

Bloomberg reports Spain, Italy Credit Ratings Lowered by Fitch as Europe Debt Crisis Worsens
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 to A+ from AA-, the company 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.

The downgrades reflect “the intensification of the euro zone crisis,” which “constitutes a significant financial and economic shock,” 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.”

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.

Socialist Government

Spain’s Socialist government, which faces a general election on Nov. 20, has said the country may miss its 2011 growth forecast of 1.3 percent as the recovery slows. Unemployment remains above 21 percent and the manufacturing industry contracted the most in more than two years in September. Regional governments, which are responsible for health and education and hire half of Spain’s public workers, are behind schedule to meet their deficit targets, preliminary data showed on Sept. 8.

The People’s Party, which polls indicate may win an outright majority in the vote, has pledged a stricter budget law, spending limits for the regional governments, and tax breaks to encourage companies to hire workers and become more competitive. PP leader Mariano Rajoy said on Sept. 15 he would send a “strong signal” to markets and wouldn’t deviate from the budget-deficit goal of 4.4 percent of gross domestic product in 2012 “under any circumstances.”
Nothing has been solved in Spain, Portugal, Italy, Greece or for that matter Europe in general.

The yield on Greek 1-Year Government Bonds ended the day at 144%.

Mike "Mish" Shedlock
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