DECEMBER 16, 2011, 5:22 P.M. ET
Moody's Cuts Belgium's Rating; Fitch Warns on France's
By GABRIELE PARUSSINI And JOAN E. SOLSMAN
Moody's Investors Service downgraded Belgium two notches Friday, following a move earlier by Fitch Ratings to lower its outlook on France's triple-A rating.
Citing risks to and uncertainties about funding, economic growth and the nation's balance sheet, Moody's cut its rating on Belgium to Aa3, which is three steps below the highest possible rating of credit quality. The downgrade concludes the review for possible downgrade Moody's initiated in October.
Moody's and other ratings firms have been downgrading and lowering their outlooks on many European sovereigns lately because of the credit crisis there. Standard & Poor's Ratings Services put France and most other countries in the euro zone on review for a downgrade on Dec 5, pending the results of the European Union summit at the end of last week.
Fitch Ratings on Friday lowered its outlook on France to "negative" from "stable," indicating there is a one-in-two chance the nation could lose its top investment-grade rating over the next two years.
The credit-ratings company said the negative outlook reflects its view that the likelihood of liabilities arising from the worsening economic and financial situation in the euro zone has materially increased.
Fitch also said that France is the most exposed to a deepening of the crisis relative to its triple-A rated euro-zone peers.
Fitch's warning comes amid mounting worries that the euro zone's second-largest economy could lose its top investment-grade ranking, with wide repercussions both at a domestic and at a regional level.
The move also came as Fitch also placed its ratings on six other euro-zone nations, including Spain and Italy, on watch for downgrade after it concluded a "comprehensive solution" the region's debt crisis is "technically and politically beyond reach."
Fitch said the measures agreed to at the Brussels summit and by the European Central Bank "were not sufficient to put in place a fully credible financial firewall to prevent a self-fulfilling liquidity and even solvency crisis for some non-AAA euro area" countries.
For France, Fitch said: "The fiscal space to absorb further adverse shocks without undermining its triple-A status has largely been exhausted."
President Nicolas Sarkozy's government has already passed two rafts of austerity measures this year —a total of €19 billion—as it seeks to stick to its public-finances targets despite an economic slowdown.
On Belgium, Moody's cited sustained deterioration in funding conditions for countries in the euro zone with relatively high levels of public debt. It said the deterioration heightened risks to Belgium, which could hinder the government's fiscal consolidation and debt-reduction efforts.
Furthermore, it said Belgium's small and open economy faces increasing medium-term risks to its growth because of the continuing need for deleveraging and austerity in the euro area.
Moody's also said the government's balance sheet is more uncertain and faces new risk stemming from the banking sector, especially related to liabilities linked to Dexia Credit Local, a unit of Dexia SA.
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The governments of France, Belgium and Luxembourg agreed to provide €90 billion of guarantees for Dexia funding over the next decade when it was dismantled in October.
In its move, Fitch said it expects France's ratio of government debt to GDP to peak at about 92% in 2014, a higher rate than other triple-A rated nations—with the exception of the U.K. and the U.S.
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Still, Fitch said France's triple-A rating is underpinned by a wealthy and diverse economy and effective institutions. The firm noted that the country has taken steps to strengthen the creditability of its fiscal consolidation effort. The company said that even France's high debt load is consistent with a triple-A rating as long as it is placed on a firm downward path by 2013-14.
But Fitch noted that since May when Fitch last affirmed France's ratings, the euro-zone crisis has intensified and the outlook for the nation's economic 2012 growth has fallen to 0.7% from 2.1%, with a 25% chance of an economic downturn.
Fitch said it doesn't expect to resolve the negative outlook until 2013—unless there is a material shock—most likely related to a worsening of the euro-zone crisis.
The ratings firm also put on downgrade watch several investment-grade-rated euro-zone nations that already had a negative outlook. In addition to Italy and Spain, that action snared Belgium, Slovenia, Ireland and Cyprus. Fitch said it expects to complete the review by the end of January. It said it would likely downgrade the ratings by one or two notches.
Belgium, rated double-A-plus, is the highest-rated sovereign of the group, while triple-B-rated Cyprus is the lowest.
On a positive note, Fitch said the nations with ratings on review for downgrade have embarked upon significant fiscal consolidation and structural reform and that those efforts are being weighed.
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However, Fitch said the nations are still vulnerable to the worsening economic environment and said the systemic nature of the euro-zone crisis " have a profoundly adverse effect on economic and financial stability across the region."
—John Kell and Tess Stynes contributed to this article.
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