Fitch cuts Italy, Spain ratings; outlook negative (Reuters)

ROME (Reuters) – Fitch Ratings on Friday cut Italy's sovereign credit rating by one notch and Spain's by two, citing a worsening of the euro zone debt crisis and a risk of fiscal slippage in both countries.

The cuts underline the growing vulnerability of the euro zone, which is already struggling to contain the turmoil in the far smaller Greek economy and which would be overwhelmed by a crisis of a similar scale in Italy.

Fitch cut Italy's rating to A+ from AA- and lowered Spain to AA- from AA+.

It kept both countries, respectively the third and fourth largest in the euro zone, on a negative outlook suggesting further downgrades could come in future.

Italy and Spain are embroiled in the region's debt crisis and are reliant on the European Central Bank to buy their government bonds to prevent yields rising to unsustainable levels.

"A credible and comprehensive solution to the (euro zone) crisis is politically and technically complex and will take time to put in place," the ratings agency said in separate statements explaining its downgrades of both countries.

Fitch's rating for Italy is now at the same level as it rates Malta and Slovakia.

After remaining on the fringes of the euro zone crisis until the summer, Italian benchmark 10-year bonds now yield around 5.5 percent, having overtaken Spain's yield of around 5 percent in a sign of markets' increasing unease about Italy.

ECB HELP

Both yields would be higher but for the ECB, which was cited by traders as supporting both countries' bonds in the market again on Friday.

Fitch, the third ratings agency to downgrade Italy in recent weeks following similar moves by Standard & Poor's and Moody's, said market confidence in Italy had been eroded by the government's initially hesitant response to the rise in yields.

The euro fell against the dollar and the yen following the downgrades and U.S. shares fell, but analysts said the move on Italy was largely discounted.

"Fitch's motivations do not differ much from what the other two agencies said. I don't foresee big moves in the markets as a reaction," said BNP Paribas strategist Alessandro Tentori.

ING analyst Paolo Pizzoli said the downgrade should be seen as further pressure on the government to adopt growth enhancing structural reforms which were lacking from a recently approved austerity plan aimed at balancing the budget in 2013.

"There has been a chorus of appeals from the ECB, the EU and the IMF. They have all asked for structural reforms for growth and this (Fitch) is another element in that direction."

Silvio Berlusconi's scandal hit government plans to present a package of measures to help growth later this month but his coalition is so weak and divided that few analysts have any confidence in its ability to adopt the deep reforms required.

Spain's Socialist government has slashed its budget deficit with a series of austerity reforms, although much of the country's debt lies in its autonomous regions which are still implementing cuts.

"LIKE A HERD"

"We respect the decision but we don't agree with it," said a spokesman at Spain's economy ministry.

Italian officials sought to make light of the downgrade. Foreign Minister Franco Frattini said it was fully expected and added dismissively that "markets don't care much about the role of Fitch, Moody's and company."

Fabrizio Saccomanni, deputy governor of the Bank of Italy, said ratings agencies "move like a herd, they all go in the same direction and at the same time." Fitch's move "doesn't change the picture," he added.

Berlusconi flew to Russia on Friday to celebrate Prime Minister Vladimir Putin's birthday, but a statement from his office said Fitch's comments were more positive than the other agencies', and Italy's fiscal efforts were widely appreciated.

Fitch said both Spain and Italy were solvent but pointed to their weakening economic growth prospects and urged Italy, one of the world's most sluggish economies for over a decade, to make "a more radical and sustained economic reform effort."

(Reporting By Gavin Jones, Fiona Ortiz, Catherine Hornby, Nigel Tutt, Francesca Landini and Silvia Aloisi; Writing by Gavin Jones; Editing by Ron Askew and Chizu Nomiyama)

Posted in: Fitch,Italy,negative,outlook,ratings,Reuters,Spain