Rating agency Fitch this evening lowered the debt ratings of five euro zone countries, including Italy and Spain, citing their poor finances and vulnerability to sharp turns in market sentiment.
Fitch dealt full downgrades to Italy, Spain, Belgium, Slovenia and Cyprus. While reaffirming Ireland's credit rating, the agency cut its outlook on Ireland due to what it called ''significant external headwinds''.
Fitch cut Italy's rating to A-minus from A-plus; Spain to A from AA-minus; Belgium to AA from AA-plus; Slovenia to A from AA-minus and Cyprus to BBB-minus from BBB, leaving that island nation just one notch above junk status. Ireland's rating of BBB-plus was affirmed. All of the ratings were given negative outlooks.
It said Ireland's negative outlook is due to the exposure of the economic downturn of our major European trading partners and the adverse impact on the euro zone debt crisis on Irish financing conditions.
''In particular, the timing and interest rate level of the sovereign's return to market financing remains uncertain, although the recent bond switch aiming at smoothing the maturities between 2014 and 2015 is an encouraging sign,'' Fitch said in a statement.
Fitch said that overall financial stability concerns have eased since the bank stress tests carried out in March and market confidence has increased in Irish financial institutions. It also noted Ireland's continued progress to meet IMF/EU bail-out programme targets.
The downgrade was another setback to European leaders' efforts to contain a crisis over too much government debt in some euro member countries.
Fitch cited the EU's slow-moving approach to fundamental reform of how the euro currency is set up, as well as the lack in the interim of a credible financial firewall with enough money to keep countries that suddenly have trouble borrowing from defaulting.
It said that European leaders "gradualist" approach to tackling the crisis meant that Europe will continue to face episodes of severe financial volatility that would erode government's ability to repay debt. It said those fears would be compounded by a shrinking economy, now that many economists expect at least a mild recession.
''The eurozone crisis will only be resolved as and when there is broad economic recovery," Fitch said. "It is evident that further substantial reforms of the governance of the eurozone will be required to secure economic and financial stability, including greater fiscal integration."
Earlier this month, the rating agency had warned that it could cut a number of euro zone countries as they struggle to cope with too much debt and slowing economic growth.
Two weeks ago Standard & Poor's downgraded half the countries in the single currency area, including formerly AAA-rated France. It also questioned the strategy of its political leaders for dealing with the euro zone debt crisis.
