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.
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
- 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.
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.
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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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