Fitch Ratings has resolved the Negative Rating Watch on six Eurozone sovereigns, downgrading the IDRs for Belgium, Cyprus, Italy, Slovenia and Spain while affirming ratings for Ireland. Greece was previously downgraded. Surprised they didn't do it again.
The Negative Outlook on all six countries indicates a slightly greater than 50% chance of a downgrade over a two-year time horizon.
More to come. Stay tuned. The solutions put forward so far by the European Central Bank for 'long-term' financing of the debt aren't working. Perhaps the world finance community doesn't believe Greece will start pulling its weight.
The rating actions on the long-term (LT) and short-term (ST) Issuer Default Ratings (IDRs) are as follows:
- Belgium LT IDR downgraded to 'AA' from 'AA+'; Negative Outlook
- Cyprus LT IDR downgraded to 'BBB-' from 'BBB'; Negative Outlook
- Ireland LT IDR affirmed at 'BBB+'; Negative Outlook
- Italy LT IDR downgraded to 'A-' from 'A+'
- Slovenia LT IDR downgraded to 'A' from 'AA-'; Negative Outlook
- Spain LT IDR downgraded 'A' from 'AA-'; Negative Outlook
All the ratings have been removed from RWN, with the Negative Outlook on all six countries indicating a slightly greater than 50% chance of a downgrade over a two-year time horizon. The eurozone 'AAA' country ceiling has been affirmed for all six sovereigns. All senior unsecured issues of the six countries are affirmed in line with the new rating levels above. The ratings of guaranteed issuance by National Asset Management Ltd. are affirmed at 'BBB+' and 'F2' in line with the Irish IDRs.
| 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. |
Moreover, rising "home bias" in the allocation of capital, the divergence in monetary and credit conditions across the eurozone, and near-term economic outlook highlight the greater vulnerability to monetary as well as financing shocks faced by these sovereign governments. Consequently, these sovereigns do not, in Fitch's view, accrue the full benefits of the euro's reserve currency status. The net impact of this revision under Fitch's sovereign rating methodology is to lower the long-term ratings of the affected sovereigns by one notch.
Simply said, Euro-zone solutions aren't working because the raters don't trust that all the Euro-zone countries will share in the solution.
This one-notch revision was applied to Belgium, Italy, Slovenia and Spain, but not to Cyprus and Ireland, where their loss of market access had already been demonstrated by their need for official/bilateral support and is already reflected in their low investment-grade ratings. The downgrade for Cyprus, and the additional one-notch cuts for Italy, Spain and Slovenia (ie a total of two notches for each) reflect country-specific concerns primarily related to the banking sector in Cyprus and Slovenia; an adverse shift in the interest-rate growth differential and hence public debt dynamics in Italy; and a significantly worsened fiscal and economic outlook in Spain. A more detailed rating rationale can be found in six separate country specific press releases also being published shortly.
Overall, 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. Nonetheless, the intensification of the eurozone crisis in the latter half of last year undermined the effectiveness of ECB monetary policy and highlighted the financing risks faced by eurozone sovereign governments in the absence of a credible financial firewall against contagion and self-fulfilling liquidity crises.