Fitch: Italy Arrears-Repayment Plan May Increase CDP Debt

Tue Mar 4, 2014 11:22am EST

LONDON/MILAN, March 04 (Fitch) Plans to use Cassa Depositi e Prestiti (CDP) to accelerate repayment of Italian public sector arrears could put pressure on CDP rating if it eventually increases its non-government guaranteed debt level, Fitch Ratings says. New Italian Prime Minister Matteo Renzi last week announced his aim of seeing that all the commercial arrears of Italy's public administration are paid off quickly, possibly through CDP, which issues and manages a substantial portion of Italy's postal savings products. It is still unclear how CDP would be involved. Proposals being floated include CDP taking over outstanding credits from banks if subnationals faced liquidity problems. This plan may not be compatible with CDP's own credit selection procedures, while a state guarantee on rescheduled subnational liabilities to support bank or CDP involvement on a larger scale could even infringe on a constitutional law that prohibits the national government from providing guarantees to subnationals. Estimates of the full size of the arrears vary from about EUR25bn (in line with the amount still outstanding after local governments repaid about EUR21bn of the EUR47bn authorized to be cleared over the 2013-2014 period), to over EUR50bn. Italy's Law 76/2013 already allows subnationals to reschedule commercial liabilities by allowing banks to take over outstanding credits from commercial suppliers and be repaid by subnationals in five years. A law which required CDP to repay arrears directly would imply funding the repayments either by withdrawing resources from its EUR135bn of deposits paid into the National Treasury or by borrowing in the market. Although the National Treasury would need to increase borrowing to meet sizeable deposit withdrawals, this would not increase gross general government debt, as it already includes CDP's deposits. It would not alter our current forecast for GGGD to peak at 133% of GDP this year, which already includes EUR50bn repayment in arrears. Outturns reducing confidence that GGGD will be placed on a firm downward path from 2014-2015 is a key sovereign rating sensitivity. A substantial increase in market borrowing would likely increase the proportion of CDP liabilities that do not benefit from a government guarantee if postal savings growth remains limited to 2% to 3% over the medium term (we forecast a 2.4% increase in 2014, down from 7.2% in 2012). Bonds issued under CDP's EMTN programme, for example, are not guaranteed, unlike postal bonds and passbook savings accounts. EMTN issuance almost doubled to EUR7bn in 2013 and market borrowing could accelerate further as annual growth in postal savings slows. CDP's 'BBB+'/Negative rating reflects the high probability of support from the Italian government in the light of the latter's guarantee on the postal savings which are overwhelming majority of the issuer's liabilities, as well as CDP's strong integration with government policy. In line with our view that an increase in non-guaranteed (non-postal savings) liabilities towards one-third of total liabilities would represent a dilution of government support, a significant move towards this level could put pressure on the ratings. CDP non-guaranteed liabilities accounted for 19% at the end of 2012. An increase in borrowing of EUR50bn would push this figure up to 30%, all other things being equal, although it is highly unlikely that market borrowing could be increased by this amount over a short time period. Contact: Raffaele Carnevale Senior Director International Public Finance +39 02 87 90 87 203 Via Morigi, 6 Ingresso Via Privata Maria Teresa, 8 20123 Milano 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. ALL 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.

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