UPDATE 2-Moody's raises Italy outlook to stable as Renzi prepares for power

Fri Feb 14, 2014 6:25pm EST

* Outlook raised to stable from negative, Baa2 rating affirmed

* Move comes as PD leader Renzi prepares to lead new government

* Moody's move reflects resilience of govt financial strength

By Giulio Piovaccari and Danilo Masoni

MILAN, Feb 14 (Reuters) - Ratings agency Moody's lifted on Friday its outlook on Italy's credit rating to 'stable' from 'negative', the first signal of a possible change in sentiment towards the country's sovereign debt since the start of the euro zone crisis.

The move comes as Italy is slowly showing signs of emerging from its longest economic recession in 60 years and as centre-left head Matteo Renzi readies to become the country's premier amid pressure to carry out much-needed structural reforms.

In December, Moody's had upgraded the outlook of Spain, which like Italy was hit hard by the sovereign debt crisis, to stable to reflect a rebalancing of its economy..

Moody's said in a statement it had improved its outlook on the euro-zone's third largest economy on the back of Italy's resilient financial strength, sinking funding costs and diminished risk the state may have to use resources to help recapitalise its banks.

"Italy's robust debt affordability is underpinned by historically low funding costs," Moody's said in a statement as it confirmed its "Baa2" rating on Italy, which is just two notches above 'junk' status.

Italy on Thursday sold three-year debt at the lowest yield since the introduction of the euro. On the secondary market on Friday 10-year bond yields held near eight-year lows of around 3.7 percent, about half the yield hit in late 2011 when Italy's crisis was in the midst of the euro zone storm.

Dietmar Hornung, Moody's Associate Managing Director for the Sovereign Risk Group, said the risk for Italy's finances deriving from its banking sector were more limited now that its largest bank had strengthened their capital base.

"As long as the recapitalisation needs that crystalize on the government's balance sheet stay below 20 billion euros, this would by itself unlikely move back the outlook back to negative," he said.

Italy has paid 4.1 billion euros in state aid to prop its No.3 bank, Banca Monte dei Paschi di Siena.

REPEATED DOWNGRADES

Moody's has carried out repeated downgrades of Italy's rating since the euro zone crisis intensified in the summer of 2011, slashing at various stages the credit worthiness of the country's sovereign debt by six notches from Aa2 to Baa2.

Standard & Poor's rates Italy BBB and Fitch gives it a rating of BBB+. Both still have a negative outlook on Italy.

Renzi, who has promised radical reforms to get the country out of its quagmire, could be named prime minister this weekend after his centre-left Democratic Party leadership forced party rival Enrico Letta to resign after 10 months.

Moody's expects Italy's debt-to-GDP ratio to peak this year at below 135 percent and said Letta's exit and expectations Renzi will head a new government does not change its forecasts.

Renzi's decision to bring down the government matured over the past fortnight, according to people close to him, after pressure from unions and Italy's business lobby which wanted faster steps to improve the country's corporate landscape.

"I hope that a new and a quicker reform drive could let Italy join the recovery that we are seeing now in the rest of Europe," said Sandro De Poli, country CEO for Italy and Israel for giant conglomerate General Electric.

Data from statistics office ISTAT on Friday showed a 0.1 percent rise in economic output in the final quarter of last year, a meagre showing but the first increase since 2011.

At 2 trillion euros Italy's public debt is equivalent to more than 130 percent of total economic output and its 12.7 percent unemployment rate is the highest since the 1970s.

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