NEW YORK - Fitch Ratings Friday downgraded the sovereign credit ratings of five euro currency countries - Italy, Spain, Slovenia, Belgium and Cyprus, contending they lack financing flexibility in the face of the regional debt crisis.
In a statement, Fitch said these countries have near-term vulnerability to monetary and financial shocks. "Consequently, these sovereigns do not, in Fitch's view, accrue the full benefits of the euro's reserve currency status," Fitch said.
Italy, the euro area's third-largest economy, was cut two levels to A- from A. The rating on Spain was also lowered two notches, to A from AA-. Ratings on Belgium, Slovenian and Cyprus were also lowered, while Ireland's rating was maintained.
The downgrades, flagged a month ago by Fitch, come as Greece negotiates with creditors on how to avoid a default and other euro nations struggle to bolster the region's defenses against contagion should those talks fail.
While sovereign-bond yields have fallen in Italy, Spain and elsewhere in recent weeks as the European Central Bank added liquidity, the 17-nation region still lacks the protection it needs for such a situation.
The ratings indicate there is a considerable chance of further downgrades in the next two years.
"The only way Europe's going to be successful in holding this together, making monetary union work, is to build a stronger firewall," U.S. Treasury Secretary Timothy Geithner warned European leaders at the World Economic Forum's annual meeting in Davos, Switzerland, Friday.
Fitch placed Spain, Italy, Ireland, Cyprus, Belgium and Slovenia on review on Dec. 16 for possible downgrades, citing Europe's failure to find a "comprehensive solution" to the region's crisis. Fitch lowered the outlook on France's AAA rating at the same time, though the company said in January that France's rating probably wouldn't be cut this year.
Italy's credit rating was cut two levels to BBB last week by Standard Poor's, which also downgraded eight other euro- region nations including France and Austria, citing European leaders' inability to contain the debt crisis.
The fallout in financial markets to SP's action was however muted.
In Fitch's opinion, the eurozone crisis will only be resolved as and when there is broad economic recovery. 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.
In the absence of greater clarity on the ultimate structure of a fundamentally reformed eurozone, the gradualist approach adopted by politicians to systemic reform will continue to be punctuated by episodes of severe financial volatility, entailing a significant economic and financial cost that erodes sovereign creditworthiness.
