Fitch downgrades five euro countries
Ireland saw its BBB+ rating affirmed but it also received a negative outlook.
It came as experts examined how the ECB could take a writedown on the Greek bonds it holds, as negotiations with private sector investors are expected to be concluded this weekend.
Fitch said that the downgraded countries — also including Belgium, Cyprus, and Slovenia — faced economic headwinds from the eurozone debt crisis that could diminish their ability to sustain their own debt loads.
The downgrade was largely expected, as Fitch had said it was reviewing the country’s ratings. It comes on top of a downgrade of nine eurozone countries by another ratings agency, Standard & Poor’s, on Jan 13.
Fitch cited the EU’s slow-moving approach to fundamental reform of how the euro currency is set up, as well as the lack in the interim of a credible financial firewall with enough money to keep countries that have trouble borrowing from defaulting.
The agency lowered ratings for the five by one notch and placed a negative outlook on them. Italy went down to A- credit rating and Spain was downgraded to A.
Meanwhile, Economics Commissioner Olli Rehn said the agreement on Greece, expected to see banks and other investors take a haircut of at least 50%, was about to be closed, “if not today, maybe over the weekend”.
It is essential to cut Greek debt to sustainable levels of 120% of GDP by 2020, if the IMF is to continue its participation. But even with private sector involvement, due to a lack of growth and slippages in reaching targets, there will be a €12bn-15bn funding gap — which may have to be bridged by the public sector.
Mr Rehn and Eurogroup president Jean Claude Juncker said earlier this week that the public sector may have to make a contribution to Greek debt, opening the way for the ECB and the central banks to take a cut.
The ECB is believed to hold about €40bn worth of Greek bonds, which it bought at 60% of face value. Normally these would be held until maturity when the ECB would expect to make a profit when paid the full value.
The profits are paid out to the eurozone countries’ central banks but there is a possibility that they could agree to forego some of this, or to exchange the bonds for ones of a longer duration. They will be anxious to avoid anything that is not permitted under the EU treaties that govern the ECB.
The ad-hoc fund put together to provide Athens with its first €110bn bailout could also take a haircut, EU sources indicated.
Countries such as Germany will be anxious to ensure that haircuts are confined to Greece and that other countries will not seek the same writedowns.
European Affairs Minister Lucinda Creighton said Ireland would not seek any haircuts from the ECB. “This issue has been aired in the Dáil and elsewhere and we are not looking for a haircut on debt but more sustainable terms and conditions,” she said.
— additional reporting Reuters
