Fitch, ECB sound alarm on European national debts

(LONDON) - The Fitch credit rating agency and the European Central Bank issued strong warnings on Tuesday about the weight of European government debt threatening financial markets and economic recovery this year.

Fitch said that on average nearly one fifth of national output would be absorbed by debt costs, but in some countries such as Italy, France and Ireland it would be about one quarter.

But the biggest and best borrowers should attract lenders without undue problems but at higher interest rates, Fitch said.

An associate director for sovereign debt at Fitch, Douglas Renwick, said: "The increase in the stock of short-term debt is a source of concern to Fitch as it increases market risk faced by governments, notably exposure to interest rate shocks."

And at the ECB in Frankfurt, which is responsible for eurozone monetary policy and interest rates, chief economist Juergen Stark said: "We are seriously concerned about forecasts of strong rises in government deficits and the indebtedness of countries in the eurozone."

He warned in a speech that this trend could lead ratings agencies to further downgrade government debt bonds and to further negative reaction in financial markets.

Two weeks ago, another leading ratings agency, Moody's, warned that 2010 would be a "difficult" year for European government debt ratings.

In November, it had warned that global goverment debts had risen by nearly 45 percent from 2007 to 2010, or by 15.3 trillion dollars (10.86 trillion euros) and in 2010 would total 49.3 billion dollars. The increase was equivalent to 100 times the Marshall Plan to rebuild Europe after World War II.

These concerns highlight an accumulation of past annual budget deficits, together forming national debts, which have risen sharply with the costs of rescuing economies during the financial crisis.

Fitch estimated that 15 of the 27 countries in the European Union, and Switzerland, would have to borrow the equivalent of 19 percent of their annual national production this year to finance budget overspending and roll over existing debt.

The warnings came amid concern about cohesion of the eurozone owing to a debt crisis in Greece and strains in other eurozone countries, notably Portugal and Ireland, that analysts say have contributed to a recent fall of the euro.

There is also concern about a sharp worsening of public finances in Britain, a member of the EU but not of the eurozone.

However, Fitch said that in absolute terms, the country with the biggest problem was France, followed by Italy and Germany, the biggest eurozone economy, with Britain some way behind.

Fitch estimated that the European countries surveyed would have to borrow 2.2 trillion euros, or the equivalent of 19 percent of their annual economic production, this year to cover deficits and extend existing debt.

This was a marginal increase from the 2009 figure "which Fitch estimates to have been close to 2.12 trillion euros (17 percent of GDP) -- itself the largest borrowing requirement seen in decades."

Fitch said that in looking at 15 EU countries and Switzerland it found that gross borrowing "in absolute terms is projected to be largest in France (454 billion euros), Italy (393 billion euros), Germany (386 billion euros), and the UK (279 billion euros)."

But as a percentage of gross domestic product, the ratio was biggest in Italy, Belgium, France and Ireland, all at about 25 percent.

However, its differing credit ratings for these countries were currently stable.

These ratings are critical for governments when they issue bonds, carrying a fixed interest or yield, to borrow on international capital markets.

A rating ranks perceived risk. If it falls, the country's bonds tend to fall, pushing up the yield relative to the new price, signalling that the borrowing country must offer a higher return on its next bond issue.

Fitch said that European governments had increased their overall debt in 2009 by 20 percent from the level in 2008.

Referring to risk aversion at the height of the crisis, it said that conditions had been favourable because of heavy demand for such debt and low interest rates.

This year, concern over national budgets and inflation, and a recovery in risk appetite, meant that "government bond yields are likely to rise, potentially quite sharply."

However, big countries with strong ratings were unlikely to experience problems in raising money "albeit at more expensive rates", but a widening of the differences in national yields would persist, Fitch forecast.

-- Dow Jones Newswires contributed to this report --