Italy and Spain debt downgraded by Fitch

image captionThis is the second downgrade of Italian debt this week

Italian and Spanish government debt have both been downgraded by the Fitch credit rating agency.

Fitch cut Italy's rating by one notch, from AA- to A+, following fellow agency Moody's downgrade earlier this week.

Fitch cited the "intensification" of the eurozone debt crisis that "constitutes a significant financial and economic shock which has weakened Italy's sovereign risk profile".

The agency also cut Spain's rating by two notches, to AA-.

Fitch raised concerns about the strength of Italian banks, particularly in light of the current debt crisis.

It talked of the "small but no longer negligible risk that a further worsening of the eurozone debt crisis and volatility in the value of Italian government bonds will further erode confidence in the banking system".

The agency said a "vicious cycle" could emerge where a growing lack of confidence in Italian banks could knock confidence in government debt, which could in turn undermine the banks further.

With regards to Spain, Fitch also cited the deepening debt crisis, and raised questions about the country's ability to cut its debt levels quickly - and its growth prospects.

The country's high underlying budget deficit and its fragile economic recovery made Spain "especially vulnerable" to external shocks, it said.

Fitch added that it expected growth to remain subdued between now and 2015, and unemployment to remain high. Spain has the highest jobless rate in the eurozone, at more than 20%.

However, the agency said the Spanish economy should grow faster than the eurozone average after this date.

New measures

Spain and Italy have introduced austerity measures designed to cut their levels of debt and restore confidence in their finances.

The Italian government has stated it wants to balance its budget by 2013.

But despite government reassurances and the European Central Bank intervening to buy up Italy's debts, Italian borrowing costs have begun to creep up again in recent weeks.

Global policymakers are discussing ways in which to resolve the debt crisis once and for all.

French President Nicolas Sarkozy is meeting the head of the International Monetary Fund, Christine Lagarde, in Paris later on Saturday. On Sunday he is due to hold talks with German Chancellor Angela Merkel in Berlin.

Plans to expand the eurozone's bailout fund, and give it greater powers, were agreed in July and have been ratified by most national parliaments.

However, these plans are now seen as inadequate. Further action is now being discussed and leaders have said they hope to announce new measures at a G20 meeting in Cannes at the beginning of November.

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