Sunday

4th Dec 2022

Moody's cuts Italy and Spain, warns France and UK

  • London's triple A rating has been put on a 'negative' outlook - its first such warning since the start of the crisis (Photo: UK Parliament)

US-based ratings agency Moody's has downgraded six eurozone countries, including Spain and Italy. It also warned that Britain and France may lose their triple-A rating, citing doubts over the bloc's capacity to cope with the debt crisis.

Its statement downgraded Italy, Malta, Portugal, Spain, Slovakia and Slovenia by one notch. It also put its outlook on Austria, France and the UK - all triple-A countries - on "negative" to reflect their "susceptibility to the growing financial and macroeconomic risks emanating from the euro area crisis."

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The announcement is the first time since the financial crisis began that the UK and the Bank of England's triple-A grade is put in doubt.

British finance minister George Osborne called it a "reality check" for his country to reduce its budget deficit. "This is proof that, in the current global situation, Britain cannot waver from dealing with its debts," he said.

The French government also said it will press ahead with budget-slashing measures.

"The government is determined to press ahead with its actions to boost growth and competitiveness, notably the reform of the financing of welfare, of employment and the reduction of public deficits," finance minister Francois Baroin said in a statement.

Moody's warning comes one month after another US-based agency, Standard & Poor's cut France's triple-A rating.

EU leaders recently pulled forward the creation of a permanent eurozone bail-out fund, the European Stability Mechanism, and agreed a new treaty on fiscal discipline. But Moody's said there is still "uncertainty over the euro area's prospects for institutional reform of its fiscal and economic framework and the resources that will be made available to deal with the crisis."

It added that: "Europe's increasingly weak macroeconomic prospects ... threaten the implementation of domestic austerity programmes and the structural reforms that are needed to promote competitiveness."

The situation leaves a "high potential for further shocks to funding conditions for stressed sovereigns and banks" across Europe.

At the same time, Moody's confirmed the triple-A rating of Germany, Finland, Luxembourg and the Netherlands as well as non-eurozone countries Denmark and Sweden. It also said Estonia, Belgium, Ireland and the eurozone's temporary bail-out fund, the European Financial Stability Facility, should keep their current ratings for now.

Spain got more bad news on Monday when Standard & Poor's and another high-profile agency, Fitch dropped the rating on several of the country's banks, including its four largest lenders.

Santander, the biggest eurozone bank by market capitalisation, saw its grade cut by two notches to A. BBVA, Bankia and CaixaBank were downgraded by one notch.

"The downgrade of Spain indicates a weakening of its ability to support its largest banks," Fitch said in a statement.

According to the Bank of Spain, the country's banking sector is struggling with €176 billion worth of problematic loans, mainly due to a real estate bubble which burst in 2008, coinciding with the start of the financial crisis.

Standard & Poor's said it expects the Spanish banking system's profitability "to remain below its historical average over the medium term as banks continue to operate in an unfavourable economic and financial environment."

France: Agencies should downgrade 'Greece-like' UK

Anglo-French relations plumbed new depths on Thursday when the French central bank said ratings agencies should downgrade Britain and its finance minister compared the UK to Greece.

EU report: 12 countries at risk of new economic crises

A first report by the EU commission looking at macro-economic data across the bloc up until 2010 warns that 12 countries, including Italy and Spain are at risk of new crises due to their public debt and lack of competitiveness.

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