Standard & Poor's Ratings Services today lowered its unsolicited long- and short-term sovereign credit ratings on the Republic of Italy to "A/A-1" from "A+/A-1+". The outlook is negative. The transfer and convertibility assessment remains "AAA", as it does for all members of the eurozone. The downgrade reflects our view of Italy's weakening economic growth prospects and our view that Italy's fragile governing coalition and policy differences within parliament will likely continue to limit the government's ability to respond decisively to the challenging domestic and external macroeconomic environment Under our recently updated sovereign ratings criteria, the "political" and "debt" scores were the primary contributors to the downgrade. The scores relating to the other elements of our methodology - economic structure, external, and monetary - did not contribute to the downgrade. More subdued external demand, government austerity measures, and upward pressure on funding costs in both the public and private sectors will, in our opinion, likely result in weaker growth for the Italian economy compared with our May 2011 base-case expectations, when we revised the outlook to negative. We believe the reduced pace of Italy's economic activity to date will make the government's revised fiscal targets difficult to achieve. Furthermore, what we view as the Italian government's tentative policy response to recent market pressures suggests continuing future political uncertainty about the means of addressing Italy's economic challenges. In my opinion, the measures included in and the implementation timeline of Italy's National Reform Plan will likely do little to boost Italy's economic performance, particularly against the backdrop of tightening financial conditions and the government's fiscal austerity program.
Access Investments-Building Awareness - European Union-ROMANIA
Tuesday, September 20, 2011
Standard & Poor's Ratings Services today lowered its unsolicited long- and short-term sovereign credit ratings on the Republic of Italy to "A/A-1" from "A+/A-1+". The outlook is negative. The transfer and convertibility assessment remains "AAA", as it does for all members of the eurozone. The downgrade reflects our view of Italy's weakening economic growth prospects and our view that Italy's fragile governing coalition and policy differences within parliament will likely continue to limit the government's ability to respond decisively to the challenging domestic and external macroeconomic environment Under our recently updated sovereign ratings criteria, the "political" and "debt" scores were the primary contributors to the downgrade. The scores relating to the other elements of our methodology - economic structure, external, and monetary - did not contribute to the downgrade. More subdued external demand, government austerity measures, and upward pressure on funding costs in both the public and private sectors will, in our opinion, likely result in weaker growth for the Italian economy compared with our May 2011 base-case expectations, when we revised the outlook to negative. We believe the reduced pace of Italy's economic activity to date will make the government's revised fiscal targets difficult to achieve. Furthermore, what we view as the Italian government's tentative policy response to recent market pressures suggests continuing future political uncertainty about the means of addressing Italy's economic challenges. In my opinion, the measures included in and the implementation timeline of Italy's National Reform Plan will likely do little to boost Italy's economic performance, particularly against the backdrop of tightening financial conditions and the government's fiscal austerity program.
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S&P rates Italian debt lower than either Moody's or Fitch Ratings, the other major ratings firm. S&P didn't have Italy on review at the time of the downgrade, but did have a negative outlook—a long-term view—on the country. The downgrade could put even more pressure on Moody's to cut its rating on the country as it completes its review by mid-October. Moody's rating is now three notches higher that S&P's rating on Italy and one notch higher that Fitch's.
S&P said Italy's weakness in its "political" and "debt" criteria drove its downgrade. It added that more subdued external demand, government austerity measures and upward pressure on funding costs will likely push economic growth below the base projections S&P made in May, when the ratings firm lowered the country's outlook. Slow growth since then will make it more difficult for Italy to meet the revised fiscal targets set earlier in the year.
Italy is the biggest euro-zone country by far to be hit by a downgrade as the European debt crisis gathers force. The country's €1.9 trillion ($2.6 trillion) in public debt is bigger than the combined debts of Greece, Spain, Portugal and Ireland, making the country too big to bail out.
Nearly all Italy's debt, equivalent to 120% of gross domestic product, is financed through the issuance of government bonds. Italy needs to sell or roll over €111.3 billion in bonds between September and the end of the year to meet its financing needs.
The downgrade is likely to drive up Italy's borrowing costs and intensify pressure on Prime Minister Silvio Berlusconi, who has faced calls to resign over his failure so far to adopt measures aimed at overhauling Italy's stagnant economy and fending off investor skepticism.
Last week the Parliament passed a €54 billion austerity package after the government spent months tweaking the measures to appease Mr. Berlusconi's allies as well as European regulators. The package's mix of tax increases, spending cuts and other budget-tightening measures failed to include concrete growth-boosting reforms demanded by rating agencies and the European Central Bank
Some Italian officials have said the government is preparing yet another round of measures that aim to tackle the big systemic weaknesses in Italy's economy, ranging from the lack of competitiveness of Italian businesses to low productivity and high youth unemployment. So far, however, the government hasn't announced any possible moves.
The downgrade could also renew stock sell-offs in Italy's embattled banking sector. Italian banks are large holders of Italian debt, a factor that helped the country ride out the worst of the financial crisis while rivals struggled. The deterioration of Italy's credit-worthiness, however, is now weighing on the balance sheets of banking giants such as Intesa Sanpaolo SpA and UniCredit SpA.
Since S&P changed its outlook on Italy to negative in May, the country's predicament has deteriorated. Its borrowing costs soared to euro-zone era highs, only to be eased by the ECB's decision to buy large amounts of Italian bonds. The ECB has warned, however, that its bond-buying program was temporary and predicated on Italy's commitment to adopting growth-boosting measures.
Italy has had its sovereign credit rating cut by Standard and Poor's , with the ratings agency keeping the country's outlook on negative in a major surprise that adds to contagion fears in the debt-stressed eurozone.
The agency cut Italy's government debt rating to A from A+ and said Italy's economic growth prospects were getting weaker, with planned reforms by the government not expected to help much.
"We believe the reduced pace of Italy's economic activity to date will make the government's revised fiscal targets difficult to achieve," S&P said in a statement.
Italy follows eurozone partners Spain, Ireland, Greece, Portugal and Cyprus in having its credit rating downgraded this year.
Kathy Lien, director of currency research at GFT, said the ratings downgrade would impact heavily on the eurozone. "This is definitely going to put a damper on any recovery in euro/dollar. Italy is a much bigger deal than Greece,'' she said. "It's a much bigger deal because a lot more countries are exposed to Italian debt than they are Greek debt. The greatest concern was never really about Greece but the contagion over to Italy and to Spain."
US stocks fell ahead of S&P's announcement but staged a late comeback as fears of a near-term Greek debt default faded on news of a possible deal to advance new bailout funds to Athens.
The Nikkei average is expected to slip on Tuesday, though it is likely to stick to a narrow range ahead of a US Federal Reserve meeting.
"Japanese markets were closed on Monday for a national holiday, meaning investors here have to catch up to all of the developments overseas," said Kenichi Hirano, operating officer at Tachibana Securities.
"Worries about Europe remain but investors are unlikely to take aggressive new positions ahead of the Fed meeting, which will keep the Nikkei trading in a range."
The news came after panic gripped global markets as a fresh showdown over Greece renewed fears that the eurozone will be plunged into crisis.
The rating for Italy, which has Europe’s second-largest debt load, was lowered from A+ to A, S&P said in a statement. The agency said the country's net general government debt is the highest among A-rated sovereigns, and now expects it to peak later and at a higher level than it previously anticipated.
“In our view, Italy’s economic growth prospects are weakening and we expect that Italy’s fragile governing coalition and policy differences within parliament will continue to limit the government’s ability to respond decisively to domestic and external macroeconomic challenges,” S&P said in a statement. "The measures included in and the implementation timeline of Italy's National Reform Plan will likely do little to boost Italy's economic performance, particularly against the backdrop of tightening financial conditions and the government's fiscal austerity program."
S&P also said it lowered its outlook for Italy’s annual average growth to 0.7pc for 2011 to 2014, from a prior projection of 1.3pc.
The Italy downgrade wiped around 70 points off the 24-hour Dow. The euro/dollar slumped more than half a cent to 1.36. The FTSE 100 is now expected to open flat on Tuesday
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