Italy has received a second downgrade this week, this time by Fitch Ratings agency which cut the country’s rating by one notch today, from AA- to A+.
Fitch raised concerns about the strength of Italian banks, particularly in light of the current debt crisis and cited the “intensification” of the eurozone debt crisis that “constitutes a significant financial and economic shock which has weakened Italy’s sovereign risk profile”.
Spain was also downgraded by Fitch to AA-, which is two notches lower.
Fitch based its downgrade on the “small but no longer negligible risk that a further worsening of the eurozone debt crisis and volatility in the value of Italian government bonds will further erode confidence in the banking system”.
The agency said a “vicious cycle” could emerge where a growing lack of confidence in Italian banks could knock confidence in government debt, which could in turn undermine the banks further.
With regards to Spain, Fitch also cited the deepening debt crisis, and raised questions about the country’s ability to cut its debt levels quickly – and its growth prospects.
The country’s high underlying budget deficit and its fragile economic recovery made Spain “especially vulnerable” to external shocks, it said.
Fitch added that it expected growth to remain “subdued between now and 2015, and unemployment to remain high”. Spain has the highest jobless rate in the eurozone, at more than 20 percent.
The euro weakened after the news of the downgrades as demand for risk was dampened.