Italy: Moody’s also gives the thumbs down

Within the framework of an unscheduled rating review the rating agency Moody’s lowered its outlook for Italy yesterday from stable to negative, but the rating agency reaffirmed its Baa2 rating. Moody’s expressly cites the reason for its decision as lying in the “no” vote of Italian voters on the reform of the Senate, which it believes will now further undermine the already slow progress made with economic and structural reforms. Moody’s concedes that Italy has made some changes in the past few years, citing among other things the labour law amendment, but these reforms have had only a slight positive impact on growth and the public finances.

As the second reason for lowering its outlook Moody’s cites the risk that the reduction of Italy’s large aggregate public debt could be postponed yet further given the low growth and new debt as well as Italy’s exposure to exogenous shocks. The rating agency draws attention here to the fact that in international terms Italy’s debt-to-GDP ratio is the third highest of all countries after Japan and Greece. For 2017 Moody’s expects the debt ratio will rise further, while it believes the subsequent decline will probably be sluggish. Another risk factor cited by Moody’s is the weak condition of the banking sector, which could also make state financial support necessary.

Following Moody’s rating decision three of the four rating agencies that are relevant for the ECB have now decided to classify current political developments as negative for Italy’s credit standing. Only S&P has recently reaffirmed its stable outlook, which is important to the extent that S&P’s BBB- rating for Italy is only just above the boundary to the “non-investment grade” segment.

Meanwhile, Italy’s Prime Minister Renzi officially submitted his resignation to president Mattarella yesterday. The Parliament had previously approved the budget for next year, thus fulfilling one of Mattarella’s conditions for releasing the current government from its duties. But Renzi remains temporarily in office until a transitional government can be formed. Pier Carlo Padoan, the former Minister of Economy and Finance, is mooted to be the most promising candidate for the office of prime minister.

It remains unclear how long this caretaker government will remain in office. At the moment there is speculation about the possibility of new elections in February or spring 2017. But there is still talk of a transitional phase until the regular elections in 2018. A major barrier to early new elections is the electoral law. According to reports in the media the president has expressed concern that the electoral law of the Chamber of Deputies has been reformed, but not that of the Senate. In addition, on 24 January the Constitutional Court has to rule whether the new electoral law for the Chamber of Deputies complies with the constitutional requirements. This means that legal or technical reasons could delay any early new elections.

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