Positive rating outlook for 2019 – with the exception of Italy

The leading rating agencies announced their rating review calendar for this year at the end of December. Prospects are good for a continuation of the positive rating trend. A total of six states have at least one positive rating outlook from one agency – in the case of Greece, as many as three out of the four leading agencies assign a positive outlook. By comparison: at the beginning of 2018, only three states were assigned at least one positive outlook. Another striking factor is that, apart from the periphery states Greece, Spain and Portugal which were already among the group of candidates with rating upgrade potential a year ago, the (semi-)core states of Finland, France and Austria have now also joined the group.

Once again, Italy is the only country in the eurozone whose rating is pointing downwards. In spite of the downgrades which have already taken place in 2018, two out of the four agencies currently assign a negative outlook to Italy. However, it is not just the negative rating trend per se which increases the risk of downgrades for Italy’s rating; the Italian government’s decision to leave the path of fiscal consolidation is also a threat to the rating. At present, the government in Rome is planning a budget deficit of 2.04% of GDP this year, which should then come down to 1.8% in 2020 and 1.5% in 2021. Although the rating agencies already anticipate higher deficits, they are likely to react if the negative balance moves towards 3% of GDP or higher. A decline in GDP growth could also trigger downgrades.

Whereas Italy faces the biggest risk of a downgrade, Greece is the number one candidate for an upgrade this year. Factors supporting this view are not only the liquidity cushion provided by ESM funds, but also that Greece is sticking to its austerity policy so far. However, parliamentary elections which take place in the autumn of this year pose a risk. The determination to stick to austerity measures could be brought to a premature end if the parties fight each other with big election concessions. There are also doubts about whether France’s policies can persuade Moody’s and Co. The upgrade in the outlook by Moody’s last year reflected the many reform measures implemented by President Macron. However, the pace of reform threatens to slow down in view of the yellow vest protests. An improved rating is therefore unlikely until France achieves a sustained reduction in its new borrowing to under the 3% Maastricht ceiling.

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