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Divergences

May 15, 2013
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EU GDP base 2005

«The eurozone economy contracted for the sixth successive quarter at the start of 2013, with gross domestic product declining 0.2% in the three months to March. The economy has now shrunk 1.5% since peaking in the third quarter of 2011 in a double-dip recession that leaves the economy still 3.4% lower than its pre-crisis peak. [...] The growing divergence in economic performance within the region is further highlighted by the fact that only Germany has seen its economy expand to a size exceeding its pre-crisis peak. Since the crisis struck, Germany’s economy has managed to grow by 1.3%, which is itself a depressingly small expansion to have seen over a five-year period, but represents a marked contrast to the fact that the Italian and Spanish economies remain some 8.6% and 6.9% smaller. The French economy has likewise failed to regain its pre-crisis peak, though is a mere 0.8% smaller.»

source: markit/@WilliamsonChris

Moody’s Affirms Italy Baa2; Negative Outlook

April 27, 2013
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Frankfurt am Main, April 26, 2013

Moody’s Investors Service has today affirmed Italy’s Baa2 long-term government bond ratings, and is maintaining the negative outlook. In addition, Moody’s has also affirmed Italy’s Prime-2 short-term debt rating.

The key factors for maintaining the negative outlook are:

  • Italy’s subdued economic outlook as a result of weak domestic and external demand (especially from its EU trading partners) and a slow pace of improvement in unit labour costs relative to other peripheral countries.
  • The negative outlook on Italy’s banking system, which is characterised by weak profitability, a deterioration of asset quality and restricted access to market funding, and which indirectly raises the cost of funding for small and medium-sized enterprises (SMEs).
  • The elevated risk that the Italian sovereign might lose investor confidence and, ultimately, access to private debt markets as a result of the political stalemate and the resulting uncertainty over future policy direction, as well as contagion risk from events in other peripheral countries.

The key factors behind the affirmation of Italy’s Baa2 rating are:

  • Low funding costs, which, if sustained, buy time for the government to implement reforms and for growth to resume.
  • The government’s primary surplus, which increases the likelihood that Italy’s debt burden will be sustainable, despite the expectation of low medium-term growth in nominal GDP.
  • Economic resiliency, which is supported by the country’s large diversified economy, the relatively low indebtedness of its private sector and the likely availability of financial support, if needed, from euro area members given Italy’s fiscal consolidation progress in recent years and Italy’s systemic importance for the euro area.

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