Moody's downgrades Italy credit rating on debt and deficit concerns

Cornelia Mascio
Ottobre 22, 2018

Moody's lowered the rating to "Baa3" from a previous "Baa2" just five months after warning of a possible downgrade for the eurozone's third-largest economy.

While this is within Commission rules for budget deficits not to exceed three percent of GDP, it is still significantly higher than the 1.8 percent targeted this year.

It said the shift towards an expansionary fiscal policy meant Italy's public debt would likely remain around the current 130% of GDP in the coming years, rather than decline.

"That makes Italy vulnerable to future domestic or externally-sourced shocks, in particular to weaker economic growth", Moody's said in a statement.

The coalition government, which took office in June, has said it needs to increase spending to boost Italy's anaemic economy.

Concerns over the budget have weighed heavily on Italian government bonds in recent weeks, with the spread between German and Italian benchmark 10-year paper hitting 5-1/2 year highs on Friday.

"I want to say it here, and there will be other solemn occasions to reiterate it as a government and a political party, ... there is no Plan B (to leave Europe) but only Plan A which is to change Europe", Di Maio said.

"The economic plans of the government, while supportive of growth in the near term, do not amount to a coherent programme of reforms that will lift Italy's mediocre growth performance on a sustained basis", it said.

Italy's ongoing budget battle with the European Union finally reverberated across the rest of the eurozone last week, when Spanish, Portuguese and Greek debt joined the selloff in Italian bonds.

Fitch on August 31 cut its outlook on Italy's "BBB" rating to "negative". Italy is still in investment grade territory.

Since receiving beefed-up powers in 2013 over member states' budgetary plans, the Commission has never asked a country to submit a revised budget.

In a letter to the Commission, Economy Minister Giovanni Tria said he recognised that the budget, which is set to hike next year's deficit to 2.4 percent of gross domestic product (GDP), was not in line with the EU Stability and Growth Pact.

The European Union on Friday (28 September) issued a stern warning to Italy's populist leaders following their defiant pledge to increase spending and run a budget deficit that risks putting Rome on a collision course with Brussels.

Di Maio told Italian radio that Italy would send a letter to the commission explaining its reasons for sticking to the 2.4% goal, adding that the government was ready to "sit at the table".

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