RPT-Fitch affirms Italy at 'BBB+'; outlook negative

Fri Oct 25, 2013 12:56pm EDT

LONDON, October 25 (Fitch) Fitch Ratings has affirmed Italy's Long-term foreign 
and local currency Issuer Default Rating (IDRs) and senior unsecured bond 
ratings at 'BBB+' with a Negative Outlook. The agency has also affirmed the 
Short-term foreign currency IDR at 'F2' and the Country Ceiling at 'AA+'.

KEY RATING DRIVERS 

The affirmation reflects the following factors:

- Italy has progressed substantially with fiscal consolidation. In 2013, the 
primary surplus is estimated by the government to be 2.4% of GDP and the 
structural deficit 0.4%, not far from the balanced budget required by the medium
term objective. The Excessive Deficit Procedure (EDP) was dropped in May 2013, 
as the public sector deficit was cut to 3% of GDP in 2012, a result of 2.3pp of 
fiscal consolidation in structural terms. 

- Gross general government debt (GGGD) is expected to peak at 133% of GDP in 
2014, one year later and 3 pp higher than forecast by Fitch in March 2013. The 
increase of the debt path is primarily due to one-off measures, mainly the 
EUR50bn (3.2% of GDP) repayment of commercial arrears in 2013-14. Fitch 
forecasts that the debt will remain above 120% of GDP until 2018, leaving very 
limited fiscal space to respond to adverse shocks.  

- The recession that started in Q311 will likely end in H213 following a 
cumulative contraction exceeding 4%. GDP is 8% below its 2007 peak. Fitch, in 
line with its previous expectations, forecasts a 1.8% contraction in 2013 to be 
followed by growth of 0.6% in 2014 and 1% in 2015. Nevertheless Italy's growth 
potential is weak, compared to both rating peers and other eurozone members.  

- The rating is supported by the large, relatively wealthy, high value-added and
diversified economy with moderate levels of private sector indebtedness.

- Moderate contingent fiscal risks from the banking sector; an underlying 
budgetary position close to that necessary to stabilise the government debt to 
GDP ratio; and a sustainable pension system supports confidence in the long-run 
solvency of the Italian state. 

- The Italian sovereign has demonstrated its financing flexibility and 
resilience during the crisis reflecting a strong domestic investor base and an 
average life of central government debt of 6.4 years. The financing costs have 
declined significantly since mid-2012 across the entire yield curve. 

RATING SENSITIVITIES 

The Negative Outlook reflects the following risk factors that may, individually 
or collectively, result in a downgrade of the ratings:

- Economic and fiscal outturns that reduce confidence that GGGD will be placed 
on a firm downward path from 2014-2015, after peaking at 133% of GDP in 2014. 

- A new bout of political turmoil resulting in paralyzed economic and fiscal 
policies, failure to comply with the constitutional and EU requirement of a 
balanced budget. 

- A deeper and longer recession would likely undermine the fiscal consolidation 
efforts and increase contingent risks from the financial sector, and could also 
weaken the political support for the consolidation path.   

- Significant public recapitalisation needs of the financial sector, on top of 
the EUR4.1bn already injected into Monte Paschi di Siena, for example in the 
context of the ECB's forthcoming asset quality review. 

The current rating Outlook is Negative. Consequently, Fitch's sensitivity 
analysis does not currently anticipate developments with a material likelihood, 
individually or collectively, of leading to a rating upgrade. However, future 
developments that may, individually or collectively, lead to a stabilisation of 
the Outlook include:

- A sustained economic recovery that supports on-going fiscal consolidation. 

- Confidence that the GGGD has peaked and will be on a firm downward path. 

- Further structural reforms that enhance the competitiveness and growth 
potential of the Italian economy.

KEY ASSUMPTIONS

The rating incorporates Fitch's assumption that the medium-term fiscal 
trajectory and commitments made by Italy under the Stability and Growth Pact and
implied by the constitutional balanced budget amendments will be sustained over 
the medium term. In particular, Fitch assumes that a primary surplus of 4% will 
be sustained from 2016 onwards, the same as the average during 1993-2002.

Fitch assumes that GDP growth will be around 1% over the medium term, 
notwithstanding the various rounds of structural reforms initiated by the 
government in the past few years and the likely large negative output gap. 

The current rating reflects Fitch's judgement that Italy will retain market 
access and a sovereign liquidity crisis remains a tail risk. The request for 
official assistance, in itself, would be neutral for the rating, though in an 
adverse scenario the activation of the ECB's Outright Monetary Transaction (OMT)
programme would be more complicated in an uncertain political environment. 

Furthermore, Fitch assumes there will be progress in deepening fiscal and 
financial integration at the eurozone level in line with commitments by euro 
area policy makers. It also assumes that the risk of fragmentation of the 
eurozone remains low. 

Contact: 

Primary Analyst

Gergely Kiss

Director

+44 20 3530 1425

Fitch Ratings Limited

30 North Colonnade

London E14 5GN 

Secondary Analyst

Douglas Renwick

Senior Director

+44 20 3530 1045

Committee Chairperson

Ed Parker

Managing Director

+44 20 3530 1176

Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: 
peter.fitzpatrick@fitchratings.com.

Additional information is available on www.fitchratings.com.

Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 
'Country Ceilings' dated 09 August 2013, are available at www.fitchratings.com.

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