| LONDON, Sept 5
LONDON, Sept 5 The world's top rating agencies
are taking a cautious stance on Mario Draghi's call for tax cuts
and growth-friendly tinkering of fiscal policy in the euro zone
and warn France's rating would be most at risk if it fails to
noticeably improve growth.
In a landmark speech last month, the head of the European
Central Bank said it would be "helpful for the overall stance of
policy" if fiscal policy could play a greater role alongside the
ECB's monetary policy, adding: "and I believe there is scope for
On Thursday he expanded on the comments, stressing that
while reform remained vital and the bloc's debt rules were
inviolable, carefully selected tax cuts and government spending
in receptive parts of the economy would be beneficial and could
even be done in a "budget-neutral way".
It marks an end to the tacit coalition of ECB support in
combination with German-style fiscal austerity that has been in
place since the outbreak of the euro zone crisis, and leaves
Draghi positioned closer to France and Italy now than Berlin.
But for rating agencies, who have only recently started to
stabilise their euro zone ratings, the change of tack revives
uncertainty about debt levels in countries they had hoped had
pretty much peaked.
"With general government debt now close to 100 percent of
GDP for the euro area overall, those sovereigns with the biggest
need for growth-promoting measures tend to have the least fiscal
flexibility left," said Moritz Kraemer, head of European
sovereign ratings for Standard and Poor's.
Moody's and Fitch are broadly of the same view.
Dietmar Hornung, a senior analyst at Moody's said that while
low growth and inflation was a "major challenge" for some euro
zone countries' creditworthiness, "if a country's debt to GDP
ratio is above 120 percent and still rising, fiscal space is
European Commission forecasts published earlier this year
even before the latest blip in the recovery, put Greek debt
rising to 177.2 percent of GDP this year, Italy's to 135.2
percent, Cyprus's to 122.2 percent and Spain's to 100.2 percent.
Among the crisis-hit countries, only Ireland and Portugal
are forecast to see modest falls, but in both debt will still be
more than 120 percent of GDP. Dublin is also struggling with one
of the biggest fiscal deficits in Europe.
"What really matters is credibility," Matt Robinson, a
senior credit officer, also at Moody's, said.
"What will be key is that it is clear that the reversal in
the debt trajectory (for countries that try and boost growth)
has not been cancelled but has just been postponed. But the
longer it is postponed the harder it is to sustain credibility."
Euro zone debt crisis r.reuters.com/hyb65p
French gvt debt and deficit link.reuters.com/qum38v
ECB rates, inflation and euro link.reuters.com/jer39v
Draghi speech here
Euro zone ratings factbox
For ratings firms, the worry is that a slackening in the
euro zone's austerity drive could see further delays in
long-promised moves to cut debts and streamline their economies
France and Italy are already angling for more time to comply
with the European budget deficit rules and France's finance
minister said this week low inflation would probably mean it has
to scale back next year's budget savings plans.
The worries are putting France at the top of the rating
firms' watch list though Italy is also a concern as its economy
struggles for momentum.
S&P and Fitch both current have a 'stable' outlook on their
respective AA and AA+ French ratings though Moody's, with its
AA+ -equivalent Aa1 rating, already has it on a 'negative'
"French debt to GDP is expected to peak next year at 96-97
percent and we have already indicated that that is very much at
the higher end of the range for a country on AA+," said James
McCormack, Fitch's global head of sovereign ratings.
"If spending didn't turn out to be growth supportive and the
debt dynamics deteriorated further, if it delayed the peaking of
debt to GDP ratio and pushed it higher, that could be a
Hornung at Moody's added: "Debt and debt to GDP metrics have
been trending up in France for years and fiscal consolidation
targets have been revised on an ongoing basis. That is not
positive for the credit."
(Reporting by Marc Jones; Editing by Toby Chopra)