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S&P downgrades Italy debt outlook, raising pressure in budget stand-off
MILAN, Oct 27, 2018 (AFP) – The ratings agency S&P on Friday downgraded its
outlook for Italy’s sovereign debt but left its credit rating untouched,
upping the pressure on Rome amid a stand-off with Brussels over its budget.
The announcement, which warned Rome’s fiscal policy was jeopardising
banks’ ability to fund the Italian economy, followed last week’s decision by
Moody’s to cut Italy’s credit rating to notch above junk status.
“The negative outlook reflects the risk that the government’s decision to
further increase public borrowing — besides exacerbating Italy’s already
weak budgetary position — will stifle the incipient recovery of the private
sector,” S&P said Friday in a statement.
The decision indicates the chance the debt grade could be cut in the
coming months.
The far-right League and anti-establishment Five Star Movement, ruling in
coalition, have refused to change their big-spending programme, which
forecasts a public deficit of 2.4 percent of GDP in 2019.
The former, centre-left government had pledged to keep next year’s deficit
to 0.8 percent of GDP in a bid to ease Italy’s vast public debt, which
amounts to a phenomenal 2.3 trillion euros.
The new plan went down like a lead balloon with Brussels, which on Tuesday
rejected it outright, accusing Rome of “openly and consciously going against
commitments made,” and requested a revision.
Markets had braced for the ratings decision.
– ‘No confidence’ –
The Moody’s downgrade to cut the debt grade to Baa3 from Baa2 had come as
international financial watchdogs sounded the alarm over Italy’s economic
choices.
That agency’s decision to give Italy a stable outlook, however, appeared
to soothe skittish markets.
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“By proposing a budget heavy on debt-fuelled spending, the country started
clashes both with the European Commission and with the market,” said Fidelity
International analysts Andrea Iannelli and Alberto Chiandetti.
“Neither has confidence in Italy’s projection that its economy will grow
at a rate of 1.5 percent or that its current debt path is politically and
financially sustainable.”
S&P said it could change the outlook to stable if the recovery takes hold
and the debt burden stabilizes.
Since mid-May, when negotiations to form the coalition in Rome began,
Milan’s stock exchange has lost more than 20 percent. The FTSE MIB closed
down another 0.7 percent on Friday.
The closely-watched “spread” — or difference between yields on 10-year
Italian government debt compared to those in fiscally conservative Germany —
has more than doubled, widening from 150 points to 309 points.
The Italian banking sector, which holds 372 billion euros worth of the
country’s sovereign debt according to the central bank, has been the hardest
hit, losing 36 percent on the Milan stock exchange.
– ‘A shared solution’ –
Rome has until November 13 to present a revised budget to Brussels and
faces a heavy fine if it fails to do so.
European Central Bank chief Mario Draghi said Thursday he was “confident”
an agreement could be reached.
In the meantime, the commission insists it wants to avoid all-out war with
the populists.
“It’s very important for the channels of communication to remain
open…and I’m not going to be the one to close them,” Economic Affairs
Commissioner Pierre Moscovici told AFP on Wednesday.
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“We need to find a shared solution because Italy is a country at the heart
of the eurozone” and “I can’t see an Italy without Europe,” he said.
But Italy’s League head Matteo Salvini and Five Star chief Luigi Di Maio,
refuse to budge.
“We open the little letters from Brussels because we have been brought up
well. We read them, we reply to them but we won’t change a comma of the
finance law,” Salvini said.
“The Italian economy is healthy” and this budget “will make it even
stronger and will create jobs,” he insisted.
Italy’s Finance Minister Giovanni Tria has signaled his concern for the
country’s banks, should the spread remain high.
Salvini shrugged off those fears Thursday, saying that should banks or
businesses run into difficulty, the government was ready to help.
In a briefing to reporters on Friday, an EU official speaking on condition
of anonymity said Italy could be the next country to call on the European
Stability Mechanism — which since 2008 has bailed troubled economies such as
Greece, Portugal and Spain.
“It’s hypothetical for now but that’s reality,” he said.
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