Sun, Oct 28, 2018 - Page 16 News List

S&P downgrades Italy’s debt outlook

FISCAL STANDOFF:The agency refrained from lowering its credit rating, but indicated that it might as Rome continues to increase public borrowing ahead of a Nov. 13 deadline


S&P Global Ratings on Friday downgraded its outlook for Italy’s sovereign debt, but left its credit rating untouched, upping the pressure on Rome amid a standoff with Brussels over its budget.

The announcement, which warned that Rome’s fiscal policy was jeopardizing banks’ ability to fund the Italian economy, followed a decision last week by Moody’s to cut Italy’s credit rating to one 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.

The decision indicates that 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 curb their big-spending program, which forecasts a public deficit of 2.4 percent of GDP next year.

The former center-left government 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 (US$2.63 trillion).

The European Commission on Tuesday rejected the new plan outright, accusing Rome of “openly and consciously going against commitments made” and requesting a revision.

However, the ratings decision was met with a renewed refusal to budge by Italian deputy prime ministers Matteo Salvini and Luigi Di Maio.

“Are ratings agencies unaware of the global financial crisis?” Salvini said on Friday.

The agencies “do not measure the wellbeing of a country’s citizens,” Di Maio said, adding: “We will continue! Change is under way.”

The Moody’s downgrade, cutting Italy’s debt grade to “Baa3” from “Baa2” — while setting the outlook at “stable” — came as international financial watchdogs sounded the alarm over Italy’s economic choices.

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 to 309 basis points.

The Italian banking sector, which according to the Bank of Italy holds 372 billion euros worth of the country’s sovereign debt, has been the hardest hit, losing 36 percent on the Milan stock exchange.

Rome has until Nov. 13 to present a revised budget to Brussels and faces a heavy fine if it fails to do so, but the commission has said that it wants to avoid all-out war with the Italian coalition.

In a briefing to reporters on Friday, an EU official said that Italy could be the next country to call on the European Stability Mechanism — which since 2008 has bailed out troubled economies, such as Greece, Portugal and Spain.

“It’s hypothetical for now, but that’s reality,” he said, speaking on condition of anonymity.

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