Sovereign debt: Euro zone countries as a whole still need to make progress on deficit reduction, while Luxembourg’s public finances are in a “strong” position, a major ratings agency said Tuesday.
In Fitch’s third quarter 2011 update on the 17 euro area nations, Greece, Ireland, Portugal and Spain received negative marks, while Austria, France, Finland, Germany, the Grand Duchy and the Netherlands got the highest grades.
Fitch praised the boosting of the Luxembourg-based European Financial Stability Fund’s lending capacity to 440 billion euro, as well as the new EU-IMF 109 billion euro loan package for Greece. Both moves were agreed by European leaders during prolonged negotiations over the past few months (photo, from left: EFSF chief Klaus Regling, European economic commissioner Olli Rehn and Luxembourg’s prime minister Jean-Claude Juncker).
However, the ratings agency said: “Ultimately, until there is a broader economic recovery and further progress on deficit reduction, further episodes of financial market volatility appear likely and downward pressure on sovereign ratings will persist.”
It also considered Greece in “restricted default” following the new EU-IMF loan deal, which more-or-less forced sovereign debt holders to buy new Greek bonds upon redemption.
Additional insights include:
Austria. Rating: AAA. Outlook: Stable. “Higher growth reduced unemployment and delivered a better-than-expected budgetary outcome,” according to Fitch.
Belgium. Rating: AA+. Outlook: Negative. Fitch said its outlook, “reflect[s] concerns about the pace of structural reform in the coming years and the ability to accelerate fiscal consolidation without a resolution to the constitutional crisis.”
Cyprus. Rating: BBB. Outlook: Negative. “This action was driven by heightened concerns about widening fiscal deficits and diminishing fiscal financing flexibility.”
Estonia. Rating: A+. Outlook: Stable. The agency noted “the country’s solid economic growth performance, exceptionally strong public finances, declining external debt ratios and signs of increasing stabilisation in the banking sector.”
Finland. Rating: AAA. Outlook: Stable. The report said: “Fitch expects Finland to maintain growth of close to 4% in 2011.”
France. Rating: AAA. Outlook: Stable. “France’s rating is underpinned by its large and diversified economy,” the agency commented.
Germany. Rating: AAA. Outlook: Stable. “There is some tentative evidence that underlying potential growth may have moved higher,” Fitch optimistically noted.
Greece. Rating: CCC. Outlook: None. The agency said: “Fitch will assign new post-default ratings to Greece and to the new debt instruments once the default event is cured with the issue of new securities to participating bondholders.”
Ireland. Rating: BBB+. Outlook: Negative. “Ireland’s economy has experienced the most severe recession in the euro area,” Fitch said.
Italy. Rating: AA-. Outlook: Stable. “Fitch does not expect a significant deterioration in Italian sovereign credit fundamentals despite the rise in Italian government bond yields in July-August 2011.”
Luxembourg. Rating: AAA. Outlook: Stable. “Public finances in Luxembourg are stronger than in most ‘AAA’ peers,” Fitch wrote.
Malta. Rating: A+. Outlook: Stable. “Manufacturing and tourism have recovered well; construction and retail have lagged behind. The banking system required no government assistance.”
Netherlands. Rating: AAA. Outlook: Stable. “GDP grew by 1.6% in 2010 and Fitch expects continued growth at around this rate in 2011 and 2012. The rise in unemployment was surprisingly limited.”
Portugal. Rating: BBB-. Outlook: Ratings Watch Negative. “The current rating level – albeit on Negative Watch – articulates Fitch’s view that the Portuguese sovereign should be able to avoid a default or restructuring of its debt.”
Slovakia. Rating: A+. Outlook: Stable. “Slovakia continues to benefit from strong growth prospects led by [foreign direct investment] in the manufacturing sector,” Fitch said.
Slovenia. Rating: AA. Outlook: Stable. The country’s GDP drop of 8.4% in 2009 “reflected the country’s sensitivity to its main European export markets, notably Germany. GDP began to recover in 2010 but only by a sluggish 1.1%, compared with the pre-recession average of 4.4%.”
Spain. Rating: AA+. Outlook: Negative. “Spain’s relatively large gross financing requirement... increases its refinancing risk relative to peers.”