This could be the best text of resignation for the Italian Government. Just perfect! A2
1) The fragile market sentiment that continues to surround euro area sovereigns with high levels of debt implies materially increased financing costs and funding risks for Italy. The country is a frequent issuer with refinancing needs of more than EUR200 billion in 2012. Although future policy actions within the euro area could reduce investors’ concerns and stabilise funding markets, the opposite is also increasingly possible. Even if policy actions were to succeed in the short term in returning some degree of normality to euro area sovereign debt markets, the underlying fragility and loss of confidence is deep and likely to be sustained. As indicated by the A2 rating, the risk of default by Italy remains remote. Nonetheless, Moody’s believes that the structural shift in sentiment in the euro area funding market implies increased vulnerability of this country to loss of market access at affordable rates that is incompatible with a ‘Aa’ rating. Moreover, the preponderance of downside risks and the potential for rapid rating transition which those risks imply are not compatible with a rating at the top end of the ‘A’ range. The repositioning of Italy’s government bond rating to A2 reflects Moody’s judgment of the balance of long-term risks facing the Italian sovereign. It is consistent with Moody’s broader reassessment of sovereign risk in the euro area, focusing on member countries that are more susceptible to confidence-related shocks due to high public debt exposure and/or large fiscal imbalances.
2) The Italian economy continues to face significant challenges due to structural economic weaknesses. These problems — mainly low productivity and important labour and product market rigidities — have been an impediment to the achievement of higher potential growth rates over the past decade and continue to hinder the economy’s recovery from the severe recession it experienced in 2009. These structural impediments to economic growth cannot be removed quickly. The government’s reform plans have only just started to address some of these structural challenges, and they need to be implemented efficiently. Moreover, moderate medium-term growth prospects for the Italian economy have been further revised downwards due to potential adverse effects of a weakening European and global growth outlook. Economic growth will be a crucial factor determining the government’s revenues, the achievement of fiscal consolidation targets and, ultimately, its debt trajectory.
3) Finally, there is increasing uncertainty for the government to achieve fiscal consolidation targets. Since more than half of the consolidation measures are based on government revenue growth, the plans are vulnerable to the high level of uncertainty around economic growth in Italy and elsewhere in the EU. Moreover, political consensus on additional expenditure cuts can be difficult to achieve. As a consequence, the government may find it challenging to generate the primary surpluses that are needed to place the public debt-to-GDP ratio and the interest burden on a solid downward trend. Moody’s expects Italy’s public debt-to-GDP ratio to reach 120% at the end of this year, up from 104% at the start of the global crisis. As well as posing a risk to Italy’s financial strength, which is a key consideration under Moody’s sovereign methodology, failure to achieve fiscal and debt targets could increase the country’s susceptibility to financial market shocks.