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Economy enters 'dangerous phase'

By Kabir Chibber Business reporter, BBC News

Protests in Rome over the austerity cuts, the latest in a series of protests

across Europe

The sovereign debt crisis continues to unfold in Europe, with every country

appearing to get sucked in one by one.

Three nations in the eurozone - the 17 nations that use the euro - have been

recipients of bailouts as attempts to solve the crisis keep stalling.

Italy became the latest to feel the domino effect of the markets when its debt

rating was lowered, the latest in a series of downgrades.

Greece, Spain, the Irish Republic and even Cyprus have also had their ratings

cut this year. The future of the euro is being questioned in a way it never has

since 1999.

Which countries have fallen, and which are feared to be next?

GREECE

The problem: Greece's huge debts, about 340bn euros ( 297bn; $478bn).

In late 2009, after months of speculation and sovereign debt crises in Iceland

and the Middle East, Greece finally admitted its debts were the highest in the

country's modern history.

Since then, a 110bn-euro bailout was passed by the eurozone last year and a

second bailout of roughly the same size was agreed earlier this year - but not

yet passed.

Most observers remain highly sceptical of Greece's ability to ever repay its

huge mountain of debt. Talk persists of an unprecedented default or of Greece

leaving the eurozone.

Because of the interconnectedness of the European economy, this would cause

huge losses for French and German banks.

Thus, though Greece has been bailed out, fears of it running out of money

continue to plague investors.

International credit markets remain wary of Greece because of its sovereign

debt rating.

Ratings: Greece is now considered to be "junk" by the ratings agencies, meaning

it has a very high chance of defaulting. S&P has cut its debt seven times since

2009, from A to CC, the third-lowest rung on its rating scale.

S&P: CC

Moody's: Ca

ITALY

The problem: Italy has the highest total debt in the eurozone, amid stagnant

growth.

CREDIT RATINGS EXPLAINED

A ratings agency is a private-sector firm that assigns credit ratings for

issuers of debt, ranking its likelihood of paying back the money.

This affects the interest rate.

Ratings are divided into investment grade and sub-investment grade, and

borrowers choose according to the level of risk they are willing to accept.

A credit downgrade can make it more expensive for a government to borrow money.

Of the agencies, Standard & Poor's is the oldest, started in 1860 to rate the

finances of US railroads.

What is a ratings agency?

In the summer, the country was charged record levels to borrow, which prompted

renewed calls to pass spending cuts.

The alternative, selling more debt, was unsustainable at rates that reached 6%.

Rome laid out 60bn euros of austerity measures and aims to balance its budget

by 2013, but markets have been concerned over its growing debt load in relation

to GDP - the second-highest behind Greece in the eurozone.

If Italy was to be bailed out, few think that the eurozone (or Germany in

particular) could actually afford it.

But Italy has the advantage of having most of its debt owed to its own people

rather than external investors. This buys it more breathing room than, say,

Greece.

Ratings: Italy was last triple-A in 1995. Since then, its rating has been

fairly stable near the top of the investment grade rankings.

S&P: A

Moody's: Aa2

SPAIN

The problem: The housing boom turned to bust, leaving the country's banks

loaded with bad debt and the highest unemployment rate in the eurozone.

Spain has also seen record borrowing costs recently, forcing its government to

adopt numerous austerity measures to get its finances under control.

Spain, like Italy, is considered too expensive a proposition for the eurozone

to realistically bail out.

This is why the eurozone has tried to help lower its cost of borrowing, rather

than give it loans as it did to its neighbour, Portugal.

Ratings: Last at the highest rating in 1992, the Iberian nation has been cut

twice since 2009.

S&P: AA

Moody's: Aa2

FRANCE

The problem: The country's banks bear a heavy exposure to Greek debt.

While France's public finances have not yet been questioned heavily by the

market, its banks have seen sharp falls on the stock market.

In September, Moody's downgraded Credit Agricole and Societe Generale after

reviewing their exposure to Greek debt.

Credit Agricole and Societe Generale have seen their share prices fall by about

two-thirds since February, while BNP has fallen by more than half.

France has also announced plans to cut spending by 45bn euros over the next

three years.

Ratings: France was given the top rating by Moody's in 1988, and kept it ever

since, despite anaemic growth.

S&P: AAA

Moody's: Aaa

GERMANY

The problem: Most of its neighbours are broke.

Unlike many of its neighbours, Germany enjoyed vigorous economic growth - GDP

rose by 3.6% in 2010. Unemployment is lower than before the 2008 crisis.

And the government plans to cut the budget deficit by a record 80bn euros by

2014.

While that growth has slowed, the main problem is that Europe's largest economy

is the biggest contributor to the bailout fund used to help stricken nations.

And Germany's banks have a heavy exposure to debt from Greece, Europe's biggest

headache.

This means in the event of a Greek default, Germany would probably have to bail

out its own banks.

But having taken the lead in bailing out three nations - Greece twice - how

many more can the country afford?

Ratings: Following reunification, the country was given the highest possible

creditworthiness by S&P in 1992 and Moody's in 1993.

S&P: AAA

Moody's: Aaa

The problem: UK banks have a heavy exposure to Irish debt.

Other than that, the UK has been relatively unscathed, while its eurozone

neighbours endure turmoil.

The coalition government has announced the biggest cuts in state spending since

World War II.

UK gilts are viewed as one of the safest investments in the world, with the

country's borrowing costs falling to recent lows.

But the situation remains precarious. The country's budget deficit was 10.3%

last year - this is just behind Greece, greater than Spain's and more than

triple that of Germany.

Ratings: In 2009, S&P lowered its outlook on British debt to "negative" from

"stable" for the first time since the agency started rating its public finances

in 1978. But the triple-A rating has been affirmed since 1993.

S&P: AAA

Moody's: Aaa

IRISH REPUBLIC

The problem: The country's banking system collapsed.

The country's biggest banks were taken under government control in the

financial crisis and recapitalised. The cost of doing that has been about 70bn

euros.

The Irish received a bailout worth 85bn euros from the eurozone and IMF, then

passed the toughest budget in the nation's history.

Since then, the IMF has said the Irish Republic is "showing signs of

stabilisation" and there is a sense that the worst has now passed.

Ratings: The Irish Republic held the highest triple-A rating as recently as

2001. S&P has cut it five times since 2009.

S&P: BBB+

Moody's: Ba1

PORTUGAL

The problem: A shrinking economy straining its budget.

The country has been the third to get a bailout, worth 78bn euros. The previous

government fell after failing to pass austerity measures, which the subsequent

government had passed.

Investors have since moved on to ongoing worries about Greece, Spain and Italy.

Ratings: Portugal has been cut four times since 2009. It was once triple-A, way

back in 1993.

S&P: BBB-

Moody's: Ba2