Fertilizer Markets and Finance

BERLIN (Reuters) - Chancellor Angela Merkel tried to deflect growing international pressure on Germany to agree an increase in the euro zone’s bailout funds Sunday by saying talks were still continuing.

Amid calls to raise the size of the permanent European Stability Mechanism (ESM) ahead of an EU summit Monday, Merkel was asked by Bild am Sonntag newspaper about “rising pressure” on Germany to “massively increase” the bailout fund.

But the chancellor did not address the issue of whether Germany would back raising the ESM and instead answered a question about what impact increasing the ESM might have on the German budget this year.

“The negotiations are continuing on whether we’ll pay in our contribution in one tranche or two tranches,” said Merkel, who has resisted calls for Germany to back increasing the bailout funds in part due to opposition in her center-right coalition.

“But independent of all that, our deficit level as far as the European Stability Pact is concerned will not be increased as a result because the money won’t be gone. It’s only to be transferred from the federal budget to the ESM.”

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LISBON (Reuters) - Fitch downgraded Portugal’s credit rating to junk status on Thursday, citing large fiscal imbalances, high debts and the risks to its EU-mandated austerity program from a worsening economic outlook.

The ratings agency cut Portugal to BB+ from BBB-, which is still one notch higher than Moody’s rating of Ba2. S&P still rates Portugal investment grade.

Fitch said a deepening recession makes it “much more challenging” for the government to cut the budget deficit but it still expects fiscal goals to be met both this year and next.

“However, the risk of slippage - either from worse macroeconomic outturns or insufficient expenditure controls - is large,” Fitch said.

The challenging economic environment was clear in a Reuters poll on Thursday, where economists forecast Portugal’s economy will contract by 2.9 percent next year, the deepest recession since the 1970s, and 1.6 percent this year, in line with the government’s estimates.

Portugal’s 10-year bond prices plunged, sending yields surging more than 100 basis points to 13.85 percent — the second highest level in the euro zone after Greece. The spread to German Bunds also rose more than 100 basis points to 1,168.

The downgrade of Portugal came after the dramatic deterioration of the euro zone crisis in recent weeks as it spread to bigger countries like Italy and Spain.

“The worsening regional outlook helped inform the downgrade (of Portugal),” Rabobank said in an analyst note. “This, in turn, underlines the mounting risk of systemic downgrades.”

Portugal sought a 78-billion-euro bailout from the European Union and IMF earlier this year and has adopted sweeping austerity measures to bring public accounts under controls.

Under the loan program Portugal must cut the budget deficit to 5.9 percent of gross domestic product this year from around 10 percent in 2010. Next year it must cut the deficit further to 4.5 percent.

STATE COMPANIES A RISK

Fitch said the state-owned “enterprise sector is another key source of fiscal risk” and has caused a number of upward revisions to the country’s debt and budget deficit figures this year. The government has said there was an unexpected fiscal shortfall of about 3 billion euros this year.

“Given these downside risks, Fitch sees a significant likelihood that further consolidation measures will be needed through the course of 2012,” Fitch said.

It sees Portugal total debt peaking at 116 percent of GDP in 2013 from 93.3 percent at the end of last year.

Filipe Garcia, an economist at Informacao de Mercados Financeiros, said that while the downgrade does not change the government’s financing conditions as it is under a bailout, it could worsen the situation for companies.

“Where (the downgrade) has an impact is on companies, such as banks and other issuers like EDP or Brisa, whose ratings are greatly influenced by the sovereign rating, leaving them in a more difficult situation,” said Garcia.

The agency said Portugal’s debt crisis poses big risks for the country’s banks. “Recapitalisation and increased emergency liquidity provision from the ECB to Portugal’s banks will, in Fitch’s view, be needed and provided,” it said.

Under Portugal’s bailout, 12 billion euros has been set aside for funding banks if necessary.

Fitch said a worsening fiscal or economic situation could lead to further downgrades. “Furthermore, although Portugal is funded to end-2013, sovereign liquidity risk may increase materially toward the end of the program if adverse market conditions persist,” Fitch said.

The government hopes to return raising debt in financial markets at the end of 2013.

(Additional reporting by Patricia Rua; Editing by Toby Chopra/Anna Willard)

By Axel Bugge

ROME (AP) — The Fitch agency downgraded its sovereign credit rating for Italy and Spain on Friday and said its long-term outlook for both countries was negative, citing high debt and poor prospects for growth.

Separately, Fitch also said it was keeping Portugal’s debt rating on watch for a possible downgrade, with a decision due by the end of the year. Portugal was the third and latest eurozone country to receive an international bailout package after Greece and Ireland.

The reports are a blow to Europe’s hopes of containing the debt crisis that has already seen three countries bailed out. Italy and Spain have the eurozone’s third- and fourth-largest economies and are widely considered too expensive to rescue.

Fitch downgraded Italy’s creditworthiness from AA- to A+, citing high public debt, low growth and the “politically technical and complex” solution necessary to fix Italy’s financial ills and earn back the trust of investors.

While saying Italy’s recent austerity measures improved its standing, “the initially hesitant response by the Italian government to the spread of contagion has also eroded market confidence in its capacity to effectively navigate Italy through the Eurozone crisis,” Fitch said.

The move came after Moody’s Investors Service on Tuesday downgraded Italy’s bond ratings to A2 with a negative outlook from Aa2. On Sept. 19, Standard & Poor’s cut Italy’s long- and short-term sovereign credit ratings one notch, though its rating is still five steps above junk status.

Premier Silvio Berlusconi’s office sought to highlight some of the positive notes in the Fitch report, including that the agency found “eminently achievable” Italy’s bid to stabilize and gradually reduce its debt to gross domestic product ratio — which at 120 percent is one of the highest in the eurozone.

Constraining growth in Italy are high public debt, high taxes, an inefficient public sector, competitive barriers, an inflexible labor market and Italy’s notorious “north-south” divide, Fitch said in warning that a “more radical and sustained” economic reform was needed to keep Italy from slipping farther from its more financially stable European peers.

Italy’s banking system has been resilient but its recent increased cost of funding “will place further pressure on already strained profitability,” Fitch said.

Despite the downgrade, Fitch said Italy’s sovereign credit profile remains “relatively strong” and that its budget position compares favorably to other European countries — another element stressed by Berlusconi in his statement.

The director general of Italy’s central bank, Fabrizio Saccomanni, noted the “herd-like” mentality of the various agencies ratings and said the Fitch downgrade wasn’t anything new.

He said Italy’s banks “have a level of solidity and capitalization that is absolutely adequate compared to European standards,” and that the Bank of Italy was in “constant dialogue” with them to ensure they have the liquidity necessary to confront any fiscal tensions, the ANSA news agency reported.

Also Friday, Fitch cut Spain’s sovereign debt rating by two notches to AA- from AA+, citing increased risks from the eurozone financial crisis as well as high debt in regional governments and weakening growth prospects.

Like Italy, Fitch kept a negative outlook on Spain, but said it expected the country to remain solvent. It says that debt reduction efforts will weigh on growth and keep unemployment high. Spain currently has the eurozone’s highest jobless rate at over 20 percent.

It said more reforms will be necessary to make Spain’s economy more competitive, particularly in the labor market, and that another euro30 billion ($40 billion) may be needed to re-capitalize the country’s weaker banks.

Banks across Europe are under pressure in markets because of investor fears that they could take heavy losses on government debt they own.

The news of the downgrade came as two Spanish banks, Banco Popular Espanol, S.A. and Banco Pastor, S.A., said they were studying a fusion which, if agreed by shareholders, could reinforce Popular as the fifth largest bank by market capitalization with euro161.3 billion ($216.69 billion).

In joint statements the banks said the deal would enable Banco Popular “to reach control of” Banco Pastor, that would “retain its brand name and its regional characteristics.”

Fitch said the debt crisis — which has seen financial markets drop severely on worries that some governments, particularly Greece, will be unable to repay all their borrowings — will take time to fix.

___

Harold Heckle in Madrid contributed to this report.

The stock market buckled Monday under the weight of a crisis in Europe and danger of recession at home. Reeling from a downgrade of American debt, the Dow Jones industrials plunged 634 points.

It was the worst day for the market since the financial crisis in the fall of 2008 and extended Wall Street’s sudden, sharp decline. Stocks have lost 15 percent of their value in just two and a half weeks.

Monday was the first trading day since Standard and Poor’s downgraded the United States’ risk-free credit rating, and the selling started at the opening bell. The Dow dropped 250 points in minutes. For the rest of the day, investors looked for safer places for their money. With few buyers left for stocks, the market could only drift lower.

The Dow finished the day down 5.5 percent. The point decline was the worst since Dec. 1, 2008, and the sixth-steepest ever. The average ended at 10,809.85, its first close under 11,000 since November.

The turmoil in the U.S. markets was the end of a daylong rout that swept the world. Stocks lost 4 percent in South Korea and 2 percent in Japan, then 5 percent in Germany and 4 percent in France.

The selling picked up again early Tuesday in Asia. Japan’s benchmark Nikkei 225 index was off nearly 5 percent, while Hong Kong’s Hang Seng index shed more than 7 percent.

In the U.S., stocks fell even though Moody’s, another major credit rating agency, stood by its top rating of Aaa for the United States. It said it could downgrade the U.S. if it did not cut its deficit, “but it is early to conclude that such measures will not be forthcoming.”

In a bit of irony following the S&P downgrade, investors decided U.S. debt was one of the safest places to be. They also sought refuge in gold, which set a record price.

“The S&P downgrade of U.S. government debt is the least of our problems,” said economist Scott Brown at Raymond James & Associates. “The bigger worry is subpar economic growth and the threat of a new recession.”