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Economy Dec 19, 2011

Fitch may downgrade France, Spain, 5 others over eurozone crisis

Fitch Ratings on Friday warned it may downgrade France and six other eurozone countries as it believes that a comprehensive solution to the region's debt crisis is "technically and politically beyond reach."

France's possible downgrade is not imminent but could come in two years, Fitch said in a statement, as it revised the outlook of the country's AAA rating to negative.

Fitch's warning, which comes as investors fear an imminent downgrade of France, Germany and several other eurozone countries by rival Standard & Poor's, dragged US stocks and the euro lower. Reuters

For the other countries - Belgium, Cyprus, Ireland, Italy, Slovenia and Spain - a downgrade could come much sooner. Those nations, which already had a negative rating outlook from Fitch, were placed on credit watch negative, which traditionally signals the possibility of a downgrade within three months at most.

"The systemic nature of the eurozone crisis is having a profoundly adverse effect on economic and financial stability across the region," Fitch said, adding that commitments made by EU leaders in a summit last week did little to ease its concerns.

EU leaders last Friday secured a historic agreement to draft a new treaty for deeper economic integration in the eurozone, but more decisive measures to stem the debt crisis remained uncertain. A new treaty could take three months to negotiate and may require referendums in countries such as Ireland.

"Of particular concern is the absence of a credible financial backstop," Fitch said. "This requires more active and explicit commitment from the European Central Bank to mitigate the risk of self-fulfilling liquidity crises for potentially illiquid but solvent euro area member states."

Analysts said the comments increased pressure on the ECB to take on a larger role in the solution of the crisis.

" It seems obvious that at some point the ECB will have to do what is necessary to stabilize the situation, which is to say (to adopt) quantitative easing," said BNP Paribas market economist Dominique Barbet.

Fitch's warning, which comes as investors fear an imminent downgrade of France, Germany and several other eurozone countries by rival Standard & Poor's, dragged US stocks and the euro lower.

The Dow Jones industrial average and the S&P 500 index slipped into negative territory just after Fitch put the six eurozone nations on credit watch negative. They were trading near the unchanged mark since then.

The euro, which was already falling against the US dollar, lurched below $1.30 after the first headlines from Fitch, dropping from $1.3018 to a session low $1.2994 before recovering some ground.

FRANCE'S FINANCES

Fitch's main concern for France is that a worsening European crisis may impose a heavy burden on government finances through rising contingent liabilities. France, the ratings agency warned earlier this month, has no more fiscal space to absorb further adverse shocks undermining its AAA status.

"Relative to other AAA euro area member states France is, in Fitch's judgement, the most exposed to a further intensification of the crisis," Fitch said.

It warned the worsening of the crisis since July constitutes a significant negative shock to France's economy and the stability of its financial sector.

Economists took Fitch's message as a clear sign that the French government must further tighten its belt.

"Fitch will watch with interest whether the French public debt ratio falls starting in 2013 -and for that we know that the deficit has to be less than 3 percent of GDP," said Societe Generale's chief economist for France Michel Martinez.

"The risks are obvious (to France's rating). The risks are that the debt crisis situation could get worse," he added.

French Finance Minister Francois Baroin said in a statement the French government was determined to keep reducing the public deficit, and pointed at several positive elements for the French economy.

"The European Banking Authority has recently reviewed downwards by more than a billion euros the amount of equity the French banks need in order to comply with their recapitalisation requirements by June 2012. These operations will not require any injection of public funds," Baroin said.

He also said that France's off-balance sheet exposure was one of the lowest among AAA - rated countries, thanks to the 2010 pension reform.

France has braced for a downgrade since S&P put the ratings of 15 eurozone countries on review on December 5, warning that its decision depended on whether euro zone leaders came up quickly with convincing responses for calming the bloc's debt crisis.

French President Nicolas Sarkozy, who has vowed for months to do everything to protect France's AAA rating, changed tack earlier this week and prepared voters for bad news by saying that a downgrade would be surmountable.

France's credit rating has blown up into one of the major themes of a presidential election in April and May and the loss of France's AAA rating could deal a serious blow to Sarkozy's credentials as a deft fiscal manager.

Reuters

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