DBRS, the Canadian credit rating agency, has downgraded the debts of Spain and Italy, citing the two countries’ deteriorating economies and worsening creditworthiness.
Italy was downgraded one notch to A, and Spain by two notches to A (low) due to a “severe deterioration” in the latter’s “credit profile”. However, DBRS affirmed its rating on Ireland at A (low). All three ratings have a “negative trend”, the agency said.
Although a small rating agency, DBRS is one of the four that the European Central Bank uses to determine collateral charges in its operations, along with Standard & Poor’s, Moody’s Investor Service and Fitch Ratings.
The fact that DBRS kept both Spain and Italy in its A rating band will be a comfort to the two countries, as some strategists had cautioned that a multi-notch downgrade that would push Rome and Madrid below the A grade could increase the charges the ECB required to accept their government bonds as collateral.
While DBRS acknowledged the Spanish government’s “strong commitment” to fiscal retrenchment, the Canadian agency warned that “further downward rating action could be triggered by a significant worsening of Spain’s ability to stabilise its public debt”, which DBRS expects to rise to almost 97 per cent of gross domestic product by 2015.
Although Italy was only downgraded one notch, DBRS also warned that Rome’s rating could be lowered further.
“Further deterioration in the growth outlook for Italy or material deviation from fiscal targets could exert further downward pressure on the ratings,” DBRS said. “Growth prospects are particularly important to achieving a sustainable path of debt reduction in Italy.”
In contrast, the Canadian rating agency noted “tentative signs of stabilisation” of Ireland’s economy, which returned to growth last year, and Dublin’s return to international debt markets earlier this summer.
Still, DBRS cautioned that Ireland’s open, export-oriented economy was exposed to the dismal European growth outlook, and pointed out that general government debt is expected to peak at about 120 per cent of gross domestic product next year.
“Fiscal slippage, the materialisation of contingent liabilities or a material worsening of Ireland’s growth prospects – as a result of external shocks or weakness in the domestic economy – could lead to downward rating action,” DBRS said.