Citigroup warning that Spain and Italy face downgrades

Spain and Italy will be downgraded by Moody’s Investors Service and Standard & Poor’s this year as the recession and debt crisis worsen, economists and strategists at Citigroup said.

Their credit ratings, along with those of Ireland and Portugal, will be lowered at least one level over the next two to three quarters, Citigroup said.

“Deficits will overshoot official forecasts in all the peripheral Economic Monetary Union countries this year and in 2013,” according to the report.

“Spain will need to enter some form of a troika programme” this year, Citigroup economists including London-based Juergen Michels wrote, referring to the aid package for Greece monitored by the EU, the European Central Bank and the International Monetary Fund.

Prime minister Mariano Rajoy has repeatedly said that Spain won’t need a bailout.

The warning comes amid a flare-up of Europe’s debt crisis. Investor confidence in the debt of Europe’s so-called peripheral countries has eroded since Spain’s announcement on Mar 2 that it won’t meet its deficit target this year, helping to push up bond yields.

Italy also delayed its goal to balance the budget by one year to 2014.

Both countries were put on negative outlook by Moody’s on Feb 13, when the rating firm downgraded six European nations, including Italy to A3 from A2 and Spain to A3 from A1. A month earlier, Standard & Poor’s cut the ratings of nine euro states, with Spain lowered to A from AA- and Italy to BBB+ from A, both with negative outlooks.

Citigroup expects a “two-notch downgrade of the Spanish sovereign later this year by S&P and a one-notch downgrade by Moody’s,” as well as a further one-level reduction by both rating companies over the longer term.

That would put Spain “at the lower end of the investment grade spectrum, reflecting the fact that whatever troika programme it enters, it is likely to retain some form of market access for medium-and long-term issuance.”

Spain, which has passed about €40bn of spending cuts and tax rises since December, is also contracting amid the highest jobless rate in Europe.

Mr Rajoy’s government forecasts the economy will shrink 1.7% this year with unemployment holding above 24%.

— Bloomberg