Europe’s AAA members at risk as crisis worsens, Fitch says

June 12 (Bloomberg) -- Sovereign credit ratings inside the euro area, including those of AAA nations, risk downgrades as policy makers fail to demonstrate they can end the region’s debt crisis, according to Fitch Ratings.

Ratings in the currency bloc are under “strong downward pressure,” Fitch Managing Director Ed Parker said at an event in Oslo today. If there’s “no light at the end of the tunnel soon,” the risk of a breakup of the 17-member euro area will rise, he said. Policy makers are likely to continue “muddling through” and the “last minute” solutions are raising the cost of managing the crisis, he said.

Euro-zone leaders presented the bloc’s fourth bailout at the weekend as Spain sought as much as 100 billion euros ($125 billion) to rescue its banks. The deal was pieced together ahead of June 17 elections in Greece that may result in Europe’s most indebted nation exiting the currency bloc as anti-austerity parties rail against bailout terms.

Yields on debt sold by Spain, Italy and Greece rose today. Spain’s 5.85 percent note due 2022 sank as the yield jumped 14 basis points to 6.65 percent. Borrowing costs on similar- maturity Italian notes rose 10 basis points to 6.13 percent. German 10-year yields gained eight basis points to 1.38 percent.

‘Positive Step’

“We have done an assessment of the recapitalization needs of the Spanish banking sector and we think, in our base case, we need 50 billion euros to 60 billion euros,” Parker said in an interview after his prepared comments. “In a stressed, kind of Irish severe stress test,” the figure might be as high as 90 billion euros to 100 billion euros, he said. “So the package that was announced on the weekend is sufficient for that assessment. We see it as a positive step that can help to stabilize things.”

The “key concern” remains the risk of contagion should Greece exit the euro, Parker said. While the direct impact of the nation’s departure would be small, a disorderly exit could also hurt the ratings of the euro region’s AAA rated nations, he said. There is “huge” uncertainty about the fate of Greece, Parker said.

Only four euro nations -- Germany, Luxembourg, Finland and the Netherlands -- still carry the top AAA credit grade at the three main ratings companies. Fitch rates Spain BBB, while it puts Italy’s long-term debt at A-.

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