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MOODY'S DOWNGRADES ITALY'S GOVERNMENT B
WASHINGTON (MNI) – The following text is a statement by Moody’s
Tuesday:
Moody’s Investors Service has today downgraded Italy’s government
bond ratings to A2 with a negative outlook from Aa2, while affirming its
short-term ratings at Prime-1. The rating action concludes the review
for downgrade initiated by Moody’s on 17 June, 2011.
The main drivers that prompted the rating downgrade are:
(1) The material increase in long-term funding risks for euro area
sovereigns with high levels of public debt, such as Italy, as a result
of the sustained and non-cyclical erosion of confidence in the wholesale
finance environment for euro sovereigns, due to the current sovereign
debt crisis.
(2) The increased downside risks to economic growth due to
macroeconomic structural weaknesses and a weakening global outlook.
(3) The implementation risks and time needed to achieve the
government’s fiscal consolidation targets to reverse the adverse trend
observed in the public debt, due to economic and political
uncertainties.
The downgrade reflects the weight of these growing risks relative
to some positive credit attributes. These include a lack of significant
imbalances in the economy or severe pressure on private financial and
non-financial sector balance sheets, as well as the actions undertaken
by the government over the summer. Moody’s notes that the size of the
rating action is largely driven by the sustained increase in the
country’s susceptibility to financial shocks due to a structural shift
in market sentiment regarding euro-area countries with high debt
burdens. A country’s susceptibility to shocks is a key factor under
Moody’s sovereign methodology.
The negative outlook reflects ongoing economic and financial risks
in Italy and in the euro area. The uncertain market environment and the
risk of further deterioration in investor sentiment could constrain the
country’s access to the 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.
RATIONALE FOR DOWNGRADE
The downgrade stems from three closely related drivers:
1) The fragile market sentiment that continues to surround euro
area sovereigns with high levels of debt implies materially increased
financing costs and funding risks for Italy. The country is a frequent
issuer with refinancing needs of more than EUR200 billion in 2012.
Although future policy actions within the euro area could reduce
investors’ concerns and stabilise funding markets, the opposite is also
increasingly possible. Even if policy actions were to succeed in the
short term in returning some degree of normality to euro area sovereign
debt markets, the underlying fragility and loss of confidence is deep
and likely to be sustained. As indicated by the A2 rating, the risk of
default by Italy remains remote. Nonetheless, Moody’s believes that 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 that is incompatible with a ‘Aa’ rating. Moreover, the
preponderance of downside risks and the potential for rapid rating
transition which those risks imply are not compatible with a rating at
the top end of the ‘A’ range. The repositioning of Italy’s government
bond rating to A2 reflects Moody’s judgment of the balance of long-term
risks facing the Italian sovereign. It is consistent with Moody’s
broader reassessment of sovereign risk in the euro area, focusing on
member countries that are more susceptible to confidence-related shocks
due to high public debt exposure and/or large fiscal imbalances.
2) The Italian economy continues to face significant challenges due
to structural economic weaknesses. These problems — mainly low
productivity and important labour and product market rigidities — have
been an impediment to the achievement of higher potential growth rates
over the past decade and continue to hinder the economy’s recovery from
the severe recession it experienced in 2009. These structural
impediments to economic growth cannot be removed quickly. The
government’s reform plans have only just started to address some of
these structural challenges, and they need to be implemented
efficiently. Moreover, moderate medium-term growth prospects for the
Italian economy have been further revised downwards due to potential
adverse effects of a weakening European and global growth outlook.
Economic growth will be a crucial factor determining the government’s
revenues, the achievement of fiscal consolidation targets and,
ultimately, its debt trajectory.
3) Finally, there is increasing uncertainty for the government to
achieve fiscal consolidation targets. Since more than half of the
consolidation measures are based on government revenue growth, the plans
are vulnerable to the high level of uncertainty around economic growth
in Italy and elsewhere in the EU. Moreover, political consensus on
additional expenditure cuts can be difficult to achieve. As a
consequence, the government may find it challenging to generate the
primary surpluses that are needed to place the public debt-to-GDP ratio
and the interest burden on a solid downward trend. Moody’s expects
Italy’s public debt-to-GDP ratio to reach 120% at the end of this year,
up from 104% at the start of the global crisis. As well as posing a risk
to Italy’s financial strength, which is a key consideration under
Moody’s sovereign methodology, failure to achieve fiscal and debt
targets could increase the country’s susceptibility to financial market
shocks.
** Market News International Washington Bureau: 202-371-2121 **
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"Y a quelque chose qui cloche là-dedans, j'y retourne immédiatement!"
Boris VIAN
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