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OVERVIEW

  • We have revised our average real and nominal GDP growth projections for Italy over the 2014-2017 forecast horizon down to 0.5% and 1.2%, respectively, from 1.0% and 1.9%, as persistently low inflation and a difficult business environment continue to weigh on Italy’s economic prospects.
  • In our opinion, Italy’s weak real and nominal economic prospects have undermined public debt dynamics more than we forecast in our June 6, 2014 report. In absolute terms, we now estimate Italian general government debt will be €2.256 trillion by year-end 2017, which is €80 billion higher (or 4.9% of estimated 2014 GDP) than we forecast in June.
  • Under our criteria, such a large increase in debt, combined with consistently low growth and eroded competitiveness, are not commensurate with a ‘BBB’ rating.
  • We are therefore lowering our long- and short-term sovereign credit ratings on Italy to ‘BBB-/A-3’ from ‘BBB/A-2’.
  • The stable outlook reflects our expectation that the government will gradually implement comprehensive and potentially growth-enhancing structural and budgetary reforms, and that household balance sheets will remain strong enough to absorb further increases in public debt. We also assume the European Central Bank’s monetary policy stance will continue to support a normalization of inflation in Italy and its key eurozone trading partners.

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OVERVIEW

  • We are affirming our ‘BBB/A-2’ long- and short-term sovereign credit ratings on the Republic of Italy.
  • The affirmation reflects our view of Italy’s wealthy and diversified economy, as well as our expectation that the government will make some progress on important structural and fiscal reforms.
  • The outlook on the long-term rating remains negative, reflecting our view of risks to the public sector balance sheet from weak real and nominal growth prospects.

RATING ACTION

On June 6, 2014, Standard & Poor’s Ratings Services affirmed its unsolicited ‘BBB’ long-term and ‘A-2’ short-term sovereign credit ratings on the Republic of Italy. The outlook on the long-term rating remains negative.

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London 25 April 2014

Fitch Ratings has revised Italy’s Outlook to Stable from Negative. At the same time the agency has affirmed Italy’s Long-term foreign and local currency Issuer Default Ratings (IDRs) at ‘BBB+’. The issue ratings on Italy’s senior unsecured foreign and local currency bonds were also affirmed at ‘BBB+’. The Country Ceiling has been affirmed at ‘AA+’ and the Short-term foreign currency IDR at ‘F2’.

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Frankfurt am Main, February 14, 2014

Moody’s Investors Service has today changed the outlook on Italy’s Baa2 government bond rating to stable from negative. Concurrently, Moody’s has affirmed Italy’s Baa2 and Prime-2 debt ratings.

The key drivers for changing the rating outlook to stable are:

1.) The resilience of Italy’s government financial strength. This is reflected in (i) Moody’s expectations of a levelling-off of Italy’s general government debt-to-GDP ratio in 2014; and (ii) the country’s robust debt-affordability profile, which is underpinned by low funding costs by historical standards, and a largely stable ratio of interest payments-to-general government revenues throughout the euro area debt crisis.

2.) The reduction of the risks for the Italian government’s balance sheet related to contingent liabilities from (i) the potential recapitalisation needs of Italian banks; and (ii) loans by the European Financial Stability Facility (EFSF, Aa1 negative) and the European Stability Mechanism (ESM, Aa1 negative) provided to euro area countries under an EU/IMF support programme.

Italy’s foreign and local-currency country ceilings for debt and deposits remain unchanged at A2/P-1. These ceilings act as a cap on ratings that can be assigned to the foreign and local-currency obligations of entities domiciled in the country.

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The negative outlook on Italy’s ‘BBB’ rating indicates that we are still uncertain whether the economic and policy trends we are seeing will hold. Despite some evidence of an incipient economic recovery and easing fiscal headwinds, we expect that weak demand for labor, combined with tight credit conditions, will limit average Italy’s GDP growth to 0.5% per year between 2014 and 2016. That would imply that even by 2016, Italian economic output would remain nearly 7% below 2007 levels. Against a backdrop of disinflationary conditions — reflecting limited monetary flexibility — we also see constrained growth in nominal GDP.

Such uncertain real and nominal economic prospects continue to raise questions about Italy’s public debt trajectory.

We expect gross general government debt to rise to 134% of GDP by the end of 2014. Our view is that key policy decisions this year may have an important bearing on economic performance, and therefore public finances. Should the current governing coalition implement growth-enhancing structural reforms, especially labor reforms, Italy’s potential growth rate could improve. This might reduce the fragmentation of Italy’s labor market and decentralize wage setting, promoting flexibility and employment. Improved governance could also go a long way toward reducing debt. We believe that decades-long governance issues have contributed to Italy’s very high net general government debt ratio, which in 2013 was the fourth-highest among the 128 sovereigns that Standard & Poor’s rates, surpassed only by Japan, Jamaica, and Greece. The governing coalition is aiming to build a cross-party consensus backing a new electoral law (as well as the adoption of a more unicameral parliamentary system), after the Italian Constitutional Court declared the 2005 electoral system to be unconstitutional. Without a new electoral regime, the next round of elections would be held under a highly proportional system, which could imply more fragmented coalitions and potentially weak policy delivery.

Our last release on Italy stated that we could lower the rating if, in particular, we conclude that the government cannot implement policies that would help to restore growth and keep public debt indicators from deteriorating beyond our current expectations. We also stated that sustained delays in effectively addressing some of the rigidities in Italy’s labor, services, and product markets–which we believe have been holding back growth–could contribute to a downgrade. On the other hand, we could revise the outlook to stable if the government implements structural reforms to the labor, product, and service markets that shift the Italian economy to a higher level of growth (for details see “Ratings On Italy Affirmed At ‘BBB/A-2’; Outlook Remains Negative,” published on Dec. 13, 2013).

source: What Are The Risks Ahead For European Sovereign Ratings In 2014? s&p