LONDON – A downward revision to Italy’s credit rating outlook has raised the chances of a similar fate for other eurozone states grappling with widening budget deficits, but analysts say downgrades are unlikely in the near future. Standard & Poor’s revised its outlook on Italian debt to negative from stable on Wednesday, citing persistent fiscal deficits and the lack of a clear budget strategy. Analysts did not rule out the prospect of downward changes to the sovereign debt outlooks of other eurozone states but said an actual ratings downgrade, which could raise the cost of borrowing, was unlikely. Governments were likely to implement measures to rein in their budget deficits, while growth would pick up later this year. «S&P were picky about deficit numbers in Italy so there is every possibility that it could be picky about deficit numbers elsewhere – in Germany, France and also Portugal and Greece,» said Padhraic Garvey, head of investment grade debt strategy at ING Barings in Amsterdam. Italy has more outstanding government debt than any other eurozone country. The European Commission forecasts debt equivalent to 110.3 percent of GDP at-end 2002, and a relatively high budget deficit of 2.4 percent of output. Portugal last year announced that it had breached the eurozone’s 3 percent budget deficit limit in 2001 – the first country in the 12-member bloc to do so. «Those most at risk are countries with high debt-to-GDP ratios, for example Greece and Belgium. But both these countries have their budget deficits under control, so any ratings changes are unlikely.» The European Commission forecasts Belgium’s debt at 105.6 percent of GDP in 2002 but the country was expected to have only a slight budget deficit. Greece’s forecast debt stands at 105.8 percent of GDP. De facto downgrade For all the talk of eurozone debt downgrades by the credit ratings agencies, markets have already factored in a reduction in the credit quality of government debt, analysts said. Yield spreads between benchmark German government bonds and almost all other eurozone states have narrowed sharply over the past year, reflecting German deficit and economic woes. The yield gap between 10-year German and French bonds is at its narrowest in over four years and the German/Spanish 10-year spread, at three basis points, is at its tightest level ever. Yields on 10-year Dutch government debt have even dipped this week below yields on German Bunds. «Markets are differentiating between countries on a perceived need to borrow and therefore spreads are quite tight,» said UBS Warburg global bond strategist Ian Douglas. Douglas added that a sharp narrowing of euro area swap spreads also reflected a market view of the deteriorating credit quality of eurozone government bonds. Eurozone swap spreads are at their narrowest since 1997 in the face of deteriorating fiscal positions among the euro area’s leading economies.