Monday 19 March 2018

Debt crisis: Italy’s credit rating slashed with warning of worse to come

MOODYS Investors Service has downgraded Italy's government bond ratings to A2 with a negative outlook from Aa2 - the result of high debt, a weak global economy and political uncertainties that delay corrective action.

While the change moves the rating down three notches, it is still investment grade. Moody's affirmed the short-term ratings at Prime-1.

Moody's said the size of the rating action is largely driven by the sustained increase in the country's susceptibility to financial shocks, however, the A2 rating indicates 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," the analysts said.

The action follows the September 19 one-notch downgrade by Standard & Poor's Ratings Services, which cut Italy's long- and short-term sovereign credit ratings to A/A-1 from A+/A-1+. That rating is still five steps above junk status. S&P analysts cited weakening economic growth for the nation and higher-than-expected levels of government debt.

The European Central Bank had demanded stiff austerity measures but doubts persist about how serious Italy is about coming to grips with its debt.

The Italian economy continues to face significant challenges due to structural economic weaknesses including low productivity and important labour and product market rigidities, Moody's said. These problems have slowed growth rates over the past decade and continue to hinder the economy's recovery from the severe 2009 recession.

The government's reform plans have only just started to address some of these structural challenges.

"It's not that unexpected but it doesn't help the situation at all,” Robbert Van Batenburg, Head of Equity Research at Louis Capital in New York told Reuters.

"They have already traded as if there was somewhat of a downgrade in the works, so it will probably force Italian policymakers to embark on more austerity programs. It will put another fiscal strait-jacket on them."

It was more bad news for Berlusconi, who is attempting to maintain his government not only through the national economic crisis but through a turbulent time personally.

Focusing on the pressing economic issues, Berlusconi this week said his government would present new stimulus measures in a few weeks to get the economy growing and so shield the country from the euro zone debt crisis.

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