Fitch downgrades five eurozone economies

US ratings agency Fitch has said it is downgrading the credit ratings of five countries that use the euro, including economic heavyweights Italy and Spain.

Fitch rating agency has downgraded the
debt ratings of five eurozone states including Spain and Italy,
pointing to the growing vulnerability of their economies.

Fitch said the downgraded countries - also including Belgium, Cyprus and Slovenia - faced financial and economic headwinds from the eurozone's 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 January 13.

The downgrade was another setback to European leaders' efforts to contain a crisis over too much government debt in some euro member countries. Ireland, Greece and Portugal have been cut off from bond market borrowing by fears that they might default and have had to take bailout loans from other eurozone governments and the International Monetary Fund.

Fitch cited the European Union's (EU) 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 suddenly have trouble borrowing from defaulting.

The agency lowered ratings for the five by one notch and placed a negative outlook on all of them. Italy went down to A- credit rating while Spain was downgraded to A. Additionally, a sixth country, Ireland, saw its BBB+ rating affirmed but it also received a negative outlook.

Italian Prime Minister Mario Monti has implemented
a number of measures to strengthen Italy's finances

Fitch Ratings blamed the revisions on "the marked deterioration in the economic outlook" in Europe and "the absence of a credible financial firewall against contagion and self-fulfilling liquidity crises".

It said that European leaders' "gradualist" approach to tackling the crisis meant that Europe will continue to face episodes of severe financial volatility that would erode governments' ability to repay debt.

It said those fears would be compounded by a shrinking economy, now that many economists expect at least a mild recession.

"The eurozone crisis will only be resolved as and when there is broad economic recovery," Fitch said. "It is evident that further substantial reforms of the governance of the eurozone will be required to secure economic and financial stability, including greater fiscal integration."

Copyright © 2012 The Press Association. All rights reserved.

EU and US economic leaders spar at Davos

EU and US economic leaders spar at Davos 

Key policy-makers from Europe and the United States thrashed out ideas for pulling the eurozone out of its debt crisis at the Davos forum on Friday, days ahead of a key European summit.

While cloistered in a snow-bound conference centre high in the Swiss Alps, the global political and business elite had one eye on Greece, hoping that a long-awaited deal to write down its debt might at last fall into place.

Greek Prime Minister Lucas Papademos is in talks with banks and insurers on a voluntary exchange of bonds that would wipe 100 billion euros ($130 billion) off the country's debt of 350 billion euros.

The deal under discussion would see private creditors take a "haircut" of at least 50 percent on 200 billion euros in debt. Previous talks stalled over the amount of interest to be paid on the remaining debt.

Any failure to strike a deal could trigger a messy default, which would be an economic disaster for Greece itself, a threat to banks holding too much sovereign debt and pile on the pressure on other eurozone state.

World markets and delegates in Davos have begun to show signs of cautious optimism that a deal is near, and that Monday's EU summit will draw a line under the debt crisis and allow governments to move on to pro-growth measures.

The finance ministers of Germany and France and the head of the European Central Bank were in Davos to debate strategy and defend the beleaguered single currency area after it was attacked by Britain's leader.

They will all then meet again on Monday in Brussels for the latest in a series of high stakes EU summits, the bloc's first since Standard & Poor's downgraded the credit rating of a slew of eurozone member states.

And US Treasury Secretary Timothy Geithner was to debate the outlook for world economy after the Obama administration acknowledged that the eurozone slump is undermining American growth ahead of the November election.

The annual forum has been marked by gloom about the state of the global economy, and in particular about Europe's struggle to cope with yawning public deficits while at the same time seeking growth and jobs.

The euro has been under pressure -- amid fears that Greece or even eventually a giant like Spain or Italy could default on its debts -- and the 17-nation bloc's economy in on the brink of renewed recession.

A fortnight after France was stripped of its triple A credit rating, Finance Minister Francois Baroin will join his German counterpart Wolfgang Schaeuble in a debate entitled: "How will the eurozone emerge from the euro crisis?"

After the Friday the 13th downgrade by Standard and Poor's, Baroin said the development was "not a catastrophe" and insisted that the government rather than the ratings agencies would decide French policy.

But the Davos meeting has reverberated with calls for eurozone nations to act decisively to restore confidence, Canada's leader Stephen Harper said that Europe's capitals have been guilty of complacency.

British Prime Minister David Cameron also piled on the pressure, reviving his simmering feud with the rest of Europe on Thursday by savaging France and Germany's plans for a new financial transactions tax.

"Even to be considering this at a time when we are struggling to get our economies growing is quite simply madness," he declared.

The eurozone has caused alarm far beyond the continent and Mexican President Felipe Calderon used his speech Thursday to urge Europe to "bring out the bazooka immediately" to prevent the problem from sinking Italy and Spain.

"It is necessary to bring out the bazooka immediately, before the gunpowder gets wet," said Calderon, who holds the rotating chair of G20 world powers.

"Don't forget that we are in the same boat. It is not just a question of a possible implosion of the euro, but a crisis across the world."

Geithner's address comes a day after the Federal Reserve cut its US growth forecast to 2.2-2.7 percent, about one-quarter percentage point below the previous forecasts, citing the eurozone crisis.

"We continue to see headwinds coming from Europe," Fed chairman Ben Bernanke said at a news conference.

The third day of the Davos gathering also focused on events in the Middle East and North Africa, with an address from Hamadi Jebali, the post-revolution Islamist premier of Tunisia, and a debate on Iran's nuclear ambitions.

Jebali's appearance is designed to imbue a rare spirit of optimism but he will speak just as eyes will be turned towards the head of the UN's atomic watchdog as he discusses the implications of Iran acquiring a nuclear bomb.

International Atomic Energy Agency chief Yukiya Amano will be joined at the debate by Ehud Barak, the defence minister of Iran's arch foe Israel.

Copyright © 2012 AFP. All rights reserved.

Bank inches towards more QE as global risks loom

Bank inches towards more QE as global risks loom

The Bank of England inched towards pumping more money into the faltering economy in January as the risks from the global economy still loomed large, minutes to the Bank's January 11-12 meeting showed on Wednesday.

The Bank of England is seen against
a blue sky in the City of London October 6, 2011.
REUTERS/Suzanne Plunkett

The central bank's minutes repeated the view that inflation was set to fall sharply in the coming months, though tensions in the Middle East carried the risk of a sharp rise in oil prices.

The 9-member monetary policy committee also noted that some positive developments moderated some of the most serious risks, pointing to the European Central Bank's generous provision of long-term liquidity.

The MPC voted unanimously to hold the target for asset purchases steady at 275 billion pounds and the key interest rate at the record-low of 0.5 percent, where it has been since March 2009.

"For some members, the risks of undershooting the (inflation) target meant that a further expansion of asset purchases was likely to be required," the minutes said in a slightly more assertive tone than last month.

Britain's economy has been moving closer to recession over the past few months though some less downbeat business surveys and retailers' strong Christmas sales raised hopes that the country may avoid another slump.

The Bank reiterated the view that output was likely to be broadly stagnant in the final quarter of 2011 and the first three months of 2012.

Most economists expect the central bank to announce another 50 billion pounds cash injection for the economy in February as the government's hands are tied by its pledge to erase the country's huge budget deficit over the next five years.

Bank governor Mervyn King said in his first key note speech of the year that falling inflation is providing the scope for further quantitative asset purchases if necessary.

The policymakers judged that there was no compelling reason to think that the impact of the current bout of quantitative easing would be materially different from the first round, the minutes showed.

The minutes reiterated the Bank's forecast that inflation would fall sharply in the near-term as one-off effects such as last year's increase in sales tax fell away, though the policymakers also noted the uncertainty in the medium-term.

"There was greater uncertainty about the speed and extent of the fall in inflation thereafter," the minutes said.

Mervyn King predict lower inflation

Some members continued to argue that risks to inflation were overall more finely balanced and it was less clear that it would fall below the target in the medium term.

In particular Bank chief economist Spencer Dale has indicated that he would want to see clearer signs that inflation was coming down as expected before voting for further asset purchases.

Inflation has eased to 4.2 percent in December, down from the three-year high of 5.2 percent hit in September, though still more than twice the central bank's target.

The Bank forecast inflation to fall below 2 percent towards the end of this year. The Britain's large utility companies announced to cut gas and energy prices over the past couple of weeks.


©Reuters 2012