UPDATE 2-Rating agencies buy into euro zone recovery story

Fri Apr 25, 2014 12:10pm EDT

* Fitch raises outlook on Italy's BBB+ rating to stable

* Fitch upgrades Spain to BBB+

* S&P raises Cypriot rating to B from B-

* S&P confirms France's at AA with stable outlook (Adds Spain upgrade)

By Valentina Za and Dominique Vidalon

MILAN/PARIS, April 25 (Reuters) - Ratings agencies gave a broadly upbeat assessment of the euro zone's creditworthiness on Friday, contrasting sharply with the reviews of recent years and reflecting growing confidence in the region's fiscal and economic recovery.

On a day of credit updates scheduled for three of the region's top four economies, Standard & Poor's affirmed its ratings on France and Fitch raised its outlook on Italy and upgraded Spain.

S&P also raised its rating on Cyprus, suggesting the recovery is spreading to the peripheral regions left most exposed to the euro zone's financial crisis. The upgrade was its second of the bailed-out country since it came close to financial collapse last year.

Borrowing costs for the countries worst hit by the crisis have fallen sharply this year as the European Central Bank's loose monetary policy encourages investors hunting for returns to bet on their recovering economies.

Italy's benchmark 10-year bond yielded 3.12 percent on the secondary market on Friday, not far from a record low of 3.07 percent hit last week.

Fitch improved by one notch Spain's sovereign credit rating to BBB+, three steps above junk.

Fitch also boosted its outlook on Italy to stable, with the sovereign rating affirmed at BBB+. That followed an upgrade earlier this month of its outlook on bailed-out Portugal to positive from negative.

Italy was a fulcrum of the debt crisis a couple of years ago, along with Spain, whose sovereign rating many investors and analysts in Madrid expect Fitch to upgrade or underpin with an improved outlook later on Friday.

S&P confirmed France's long-term rating at AA with a stable outlook.

In a separate statement about the euro zone as a whole, Fitch said improving public finances were "major achievements," although still-high debt levels in the region and its weak medium-term growth outlook warranted caution.

BLAME GAME

A wave of euro zone credit downgrades during the financial crisis led policymakers and economists to blame the ratings agencies for exacerbating investor flight from the region - blame the agencies say is misplaced.

Prosecutors in southern Italy have requested that two ratings agencies stand trial for allegedly prompting a sell-off of Italian assets with downgrades between 2010 and 2012. The agencies say the accusations are baseless.

Today, the mood seems to be shifting in Europe.

The euro zone's recession ended in the second quarter of last year. Market pressures on weaker countries have eased, in part because of domestic reform efforts but also because of an ECB pledge to do whatever it takes to save the euro.

For France, S&P praised efforts by the country's Socialist government to boost competitiveness by reducing labour costs and corporate taxation.

France on Wednesday signed off on a fiscal package that includes 50 billion euros in spending cuts between 2015 and 2017, as it raised its official deficit forecasts for this year and the next.

In upgrading Spain, Fitch cited improved financing conditions, a more certain economic outlook and the diminished risk from Spain's banks, which have gone through a massive clean-up and recapitalisation.

Standard and Poor's Spain rating stands at BBB-, just above junk. Moody's raised Spain to two notches above junk in February.

Fitch mentioned a number of risks still hanging over Spain, including a still-large public deficit and climbing public debt pile, weak medium-term growth prospects and exceptionally high joblessness. One of four members of the Spain's labour force is jobless.

In Italy, Fitch cited improved funding conditions and an end to the country's worst post-war recession among reasons to raise the outlook. It also mentioned recapitalisation efforts at Italian banks, which are planning to raise about 10 billion euros from investors and are less likely now to need public aid.

However, it warned that with public debt set to peak at 135 percent of national output this year and stay above 130 percent until 2017, Italy had limited ability to react to potential shocks.

"Generally, and for Italy in particular, the upwards 're-rating' process is very slow and reflects the fact that risks remain that cannot be ignored," said Alberto Gallo, the head of European macro-credit research at Royal Bank of Scotland.

Fitch last cut Italy's rating to BBB+ in March 2013, following inconclusive elections that led to a two-month political stalemate. Fresh political paralysis could hurt the rating, Fitch warned.

Italian Prime Minister Matteo Renzi leads a coalition of former rivals he inherited from his predecessor Enrico Letta, whom he ousted in a party coup earlier this year. (Additional reporting by Renee Maltezou in Athens, Giulio Piovaccari in Milan, Julien Toyer and Fiona Ortiz in Madrid, Editing by Alessandra Galloni, John Stonestreet and Alison Williams, and Larry King)

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