ROME (AP) — 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 Sept. 19, 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.
Premier Silvio Berlusconi's office sought to highlight some of the positive notes in the Fitch report, including that the agency found "eminently achievable" Italy's bid to stabilize and gradually reduce its debt to gross domestic product ratio — which at 120 percent is one of the highest in the eurozone.
Constraining growth in Italy are high public debt, high taxes, an inefficient public sector, competitive barriers, an inflexible labor market and Italy's notorious "north-south" divide, Fitch said in warning that a "more radical and sustained" economic reform was needed to keep Italy from slipping farther from its more financially stable European peers.
Italy's banking system has been resilient but its recent increased cost of funding "will place further pressure on already strained profitability," Fitch said.
Despite the downgrade, Fitch said Italy's sovereign credit profile remains "relatively strong" and that its budget position compares favorably to other European countries — another element stressed by Berlusconi in his statement.
The director general of Italy's central bank, Fabrizio Saccomanni, noted the "herd-like" mentality of the various agencies ratings and said the Fitch downgrade wasn't anything new.
He said Italy's banks "have a level of solidity and capitalization that is absolutely adequate compared to European standards," and that the Bank of Italy was in "constant dialogue" with them to ensure they have the liquidity necessary to confront any fiscal tensions, the ANSA news agency reported.
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. Spain currently has the eurozone's highest jobless rate at over 20 percent.
It said more reforms will be necessary to make Spain's economy more competitive, particularly in the labor market, and that another euro30 billion ($40 billion) may be needed to re-capitalize the country's weaker banks.
Banks across Europe are under pressure in markets because of investor fears that they could take heavy losses on government debt they own.
The news of the downgrade came as two Spanish banks, Banco Popular Espanol, S.A. and Banco Pastor, S.A., said they were studying a fusion which, if agreed by shareholders, could reinforce Popular as the fifth largest bank by market capitalization with euro161.3 billion ($216.69 billion).
In joint statements the banks said the deal would enable Banco Popular "to reach control of" Banco Pastor, that would "retain its brand name and its regional characteristics."
Fitch said the debt crisis — which has seen financial markets drop severely on worries that some governments, particularly Greece, will be unable to repay all their borrowings — will take time to fix.
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Harold Heckle in Madrid contributed to this report.
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