Italy’s government undeterred after rating agency ruling

Italy's government undeterred after rating agency ruling

Italian government unimpressed in budget dispute after another rating agency’s verdict.

Standard& poor’s (S&P) had threatened to downgrade italy’s creditworthiness. Prime minister giuseppe conte said on saturday night that the rating agency had not changed its rating. "We have confidence that the market and international institutions will understand the effectiveness of our downgrades."

S&P had lowered its outlook from "stable" to "negative" on friday evening. However, the agency in london announced that the credit rating would remain at "BBB" for the time being. These are two levels above the so-called ram level, which describes highly speculative investments.

The italian government’s budget policy has been causing major uncertainty on the financial markets for weeks, because italy wants to take on more new debt. The EU commission had rejected the draft budget. The coalition of the euro-critical funf-sterne movement and the right-wing lega, however, does not want to deviate from its debt plans.

Deputy prime minister and head of lega matteo salvini declared: "in italy, neither banks nor companies are going up in smoke."The second vice-premier, star chief luigi di maio, stressed that the rating for italy was confirmed. "We continue! The change is coming."

In the rating agency’s view, "the italian government’s economic and budgetary plans are weighing on the country’s growth prospects". Weaker economic growth has a negative impact on government debt as a percentage of gross domestic product (gdp). The government’s plans would reduce investor confidence in italian government bonds. This is reflected in the recent marked rise in yields on these securities. The development also threatens the already troubled italian banks. These hold high levels of domestic bonds.

The italian government had presented a draft budget that did not comply with the rules in the euro zone. So the budget deficit next year is expected to be 2.4 percent. Originally, 0.8 percent had been pledged. The budget was rejected by the EU commission. Standard& poor’s also doubts the government’s figures. Instead, a deficit of 2.7 percent is expected.

A week ago, the rating agency moody’s had already lowered the creditworthiness of the third-largest economy in the euro zone. The markets reacted relatively calmly, as the current "BBB-" rating is still above the so-called "ram" level, which describes highly speculative investments. In addition, moody’s did not envisage a further downgrade. S&P’s decision therefore did not initially cause any major movements in the euro exchange rate either.

The ratings are important because investors such as bond funds and insurance companies use them as a guide. If at some point all four major rating agencies (S&P, moody’s, fitch and DBRS) were to lower italy to the so-called ram level, then the country would have a gross problem. Then the european central bank (ECB) was no longer allowed to buy italian bonds or accept them in its operations. For conservative investors, the securities were then off-limits. In the height of the european debt crisis, downgrades by rating agencies had made the crisis worse and worse. At that time, the creditworthiness of countries like greece, ireland, spain, portugal and italy was lowered at a rapid pace.


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