Fitch: Italian PM Change Highlights Political Volatility

Mon Feb 17, 2014 10:34am EST

LONDON, February 17 (Fitch) The resignation of Prime Minister Enrico Letta and his replacement by Democratic Party (PD) leader Matteo Renzi underscores the volatility of Italian politics, Fitch Ratings says. Renzi will be Italy's fourth prime minister since November 2011. Uncertainty about the durability of governments and their capacity for structural reform and fiscal consolidation is one reason for the Negative Outlook on Italy's 'BBB+' rating. This is the latest episode of political volatility since last February's inconclusive parliamentary elections (increased political uncertainty, combined with the depth of Italy's recession, prompted our downgrade to 'BBB+' in March). Letta's "grand coalition", which took office in April, has already changed shape because of the split in the centre-right that created the New Centre Right (NCD) party. Despite the coalition's legislative majority, policies like those in the draft 2014 budget reflected political bargaining and disputes between and within the major political parties. It is not yet clear what continuity there will be between Renzi's administration and Letta's. NCD leader Angelino Alfano has said that negotiations on a new government's composition and policy programme should not be rushed. Although the PD largely backed Renzi's challenge, it is not certain that he will receive full support on policy, especially in the upper house. So even if there is a quicker political reconfiguration than last spring, the new prime minister will probably face similar challenges to his predecessor in building and holding together a government that can agree and enact reforms that, Fitch believes, would boost Italian economic competitiveness and growth, and comply with EU and Italian fiscal rules. Our sovereign ratings assessment remains focused on the authorities' fiscal stance, and structural reform. Italy has achieved significant fiscal consolidation in recent years (the EU's Excessive Deficit Procedure was dropped in mid-2013), but we still forecast gross general government debt to peak above 130% of GDP this year, and stay above 120% of GDP until 2018, leaving very limited fiscal space to respond to shocks. Economic and fiscal outturns that reduce confidence that GGGD will be on a firmly downward path from 2014-2015 would put pressure on the rating, as would failure to meet Italian constitutional and EU requirements for a balanced budget. Italy emerged from its recession in 4Q13, posting real GDP growth of 0.1% on 3Q13. But the recession has been long and deep - the 1.8% GDP decline over 2013 was in line with our forecasts - and growth potential remains weak. Structural reforms that boosted potential growth would be credit positive, as would a sustained recovery that supported consolidation. A proposed law that would ensure the party that won a general election achieved a majority in the lower house while the upper house would be reconfigured to mostly deal with territorial matters, agreed in January by Renzi and Forza Italia leader Silvio Berlusconi, has been discussed in parliament. It is not clear what impact the latest events will have on its process through the legislature. Fitch believes that electoral reform would be credit positive if it resulted in a more stable political framework. Contact: Gergely Kiss Director Sovereigns +44 20 3530 1425 Fitch Ratings Ltd 30 North Colonnade London E14 5GN Douglas Renwick Senior Director Sovereigns +44 20 3530 1045 Mark Brown Senior Director Fitch Wire +44 20 3530 1588 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.