Thu, Oct 06, 2011 page10

• Moody’s slashes Italy’s bond rating

  STEEP DROP: Rather than dropping one or two notches, as had been expected, Moody’s reduced Italy’s long-term government bond rating by three levels to ‘A2’

  • AFP, MILAN, Italy, and PARIS
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  Ratings agency Moody’s on Tuesday downgraded Italy’s government bond rating from “Aa2” to “A2” with a negative outlook, citing risks for the financing of long-term debt and slow economic growth.

  The negative outlook, which suggests a further downgrade in the near future, “reflects ongoing economic and financial risks in Italy and in the euro area,” the agency said in a statement delivering a fresh blow to Italian Prime Minister Silvio Berlusconi’s fragile coalition government.

  The Moody’s move came two weeks after fellow ratings agency Standard & Poor’s downgraded Italy’s sovereign debt rating, citing economic, fiscal and political weaknesses.

  Most analysts had expected a downgrade of one or two notches, but Moody’s reduced the Italian rating by three levels and warned that an uncertain market environment and risk of further deterioration in investor sentiment could constrain the country’s access to public debt markets.

  “If such risks were to materialise and the long-term availability of external sources of liquidity support were to remain uncertain, the country’s rating could transition to substantially lower rating levels,” Moody’s said.

  The Berlusconi government sought swiftly to downplay Moody’s decision, saying it was “expected” and the administration was working “with even greater determination to achieve our objectives for the public finances.”

  Interest rates on Italy’s enormous debt jumped after the S&P downgrade, with investor confidence also hit by the announcement that the public deficit climbed in the second quarter.

  Italy has an enormous debt of more than 1.9 trillion euros (US$2.5 trillion), which comes to about 120 percent of the country’s output. Despite its decision to downgrade Italian debt, Moody’s, unlike many other observers, insisted that “a default by Italy remains remote,” retaining its short-term rating at “Prime-1.”

  However it warned “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.”

  One of the main drivers for the downgrade was a material increase in long-term funding risks for the eurozone countries with high levels of public debt, such as Italy, Moody’s said.

  There was also an increased risk to economic growth due to macroeconomic structural weaknesses, such as low productivity and market rigidities, and a weakening global outlook.

  Separately, S&P said on Tuesday it affirmed the credit ratings on bailed-out Portugal, with the outlook remaining negative, meaning the level could be lowered in the future.

  S&P said Portugal was “strongly committed” to its EU-IMF debt rescue program and the tough fiscal targets set, which it should be able to get close to — by introducing additional austerity measures if need be.

  In its assessment, the agency warned that the Portuguese economy “is likely to contract in the near term more severely than we previously expected due to weaker external demand and tighter credit conditions.”

  Despite the efforts already made, S&P said “Portugal’s high levels of public and private sector debt, along with its weak external liquidity and high external debt, remain rating constraints.”

  S&P said Portugal’s national debt would peak at 106 percent of GDP in 2013, but that Lisbon would continue to find funding support from outside lenders. The circumstances remained fragile, however, and S&P justified its negative outlook for Portugal on “implementation risks related to the EU-IMF program, which could affect our assessment of Portugal’s political commitment or the fiscal risks.”

  In July, Moody’s slashed Portugal by four notches.
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