May 6, 2010 / 5:16 PM / 10 years ago

UPDATE 3-Italy hikes debt outlook, agencies say rating stable

* Italy trims 2010 GDP forecast, sharply cuts 2011

* Raises debt-GDP forecasts for 2010, 2011, 2012

* All 3 ratings agencies reiterate Italy outlook stable

* Yield spread jumps between Italian, German 10-year bonds

(adds stock market fall, Fitch, Moody’s)

By Gavin Jones and Daniel Flynn

ROME, May 6 (Reuters) - Italy on Thursday cut its economic growth outlook and hiked its debt forecasts as one ratings agency warned its banks were vulnerable and another denied rumours it was poised to cut its sovereign debt ratings.

An Economy Ministry document marginally trimmed the forecast for 2010 gross domestic product growth to 1.0 percent from 1.1 percent and cut the 2011 forecast much more significantly to 1.5 percent from 2.0 percent.

As fears grow of contagion from Greece’s debt crisis to other euro zone countries, Rome raised its public debt forecast to 118.4 percent of GDP this year compared with a previous forecast of 116.9 percent, made in January.

The 2011 forecast was hiked to 118.7 percent from 116.5 percent and 2012 raised to 117.2 percent from 114.6 percent. Ratings agency Standard & Poor’s reiterated Italy’s sovereign debt outlook was stable after the spread between Italian and German benchmark 10-year bonds had widened to around 130 basis points on the rumour it was poised to downgrade Italy.

The spread continued to widen sharply and reached 153.2 basis points before closing at 139.4.

Milan's FTSE MIB blue chip stock index .FTMIB fell more than 6 percent at one stage, with financial stocks particularly hard hit and analysts attributing the fall to worries over Italy's sovereign risk. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For a graphic of Italian BTP vs German bund bond spreads: here ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Moody’s earlier on Thursday issued a report saying the country’s banking system faced “major risk” if market pressure on sovereign debt should increase. [ID:nWLA3277]

A Bank of Italy source rebutted that charge, saying the country’s banks were “solid”.

Moody’s and the third rating agency, Fitch, later told Reuters their stable outlooks on Italy’s ratings were not under review. A Moody’s spokesman said its report on the banking system had no implications for the sovereign debt rating.

Fitch Managing Director Brian Coulton said the changes to the government’s growth and debt forecasts were insignificant for the rating outlook.

“The reason Italy has not been in the firing line to the same extent as some others is the fiscal deficit,” he said, noting Italy’s 2009 deficit of 5.3 percent of GDP compared with roughly double digit figures for its Mediterranean neighbours.

“VERY STRONG POSITION”

Deutsche Bank economist Gilles Moec said there was currently no case for changing Italy’s ratings and it should not even be grouped with so-called “peripheral” euro zone countries such as Greece, Spain and Portugal.

“In 2010 I would still see Italy in a very strong position relatively to other euro zone countries,” he said.

The government’s forecasting document made no change to its forecasts for the budget deficit this year or next, seen at 5.0 percent of GDP in 2010 and 3.9 percent in 2011.

The deficit is also still targeted to fall to 2.7 percent, below the European Union’s 3 percent ceiling, in 2012.

To achieve that goal the primary budget balance — the budget gap net of debt servicing costs — will improved by a total of 1.6 percent of GDP, the document said, with measures worth 0.8 percent in 2011 and the same in 2012.

No new measures will be adopted to rein in the 2010 deficit, it spelled out.

Moec said the new figures merely bring the government into line with most private sector forecasters and he backed Rome’s decision not to take any additional deficit cutting measures this year after the fiscal prudence adopted in the recent past.

“They can draw on their performance in 2009 not to rock the boat of recovery in 2010,” he said.

Italian Economy Minister Giulio Tremonti has won plaudits for shunning significant stimulus measures like those adopted in many countries during the deep recession of 2009, and thus preventing any similar surge in Italy’s budget deficit.

Moec said that in view of Italy’s relatively low budget deficit and relative lack of private sector debt there should be little reason for concern over debt sustainability.

However, in the current volatile market the risk that it could be “singled out for attack” could still not be ruled out.

Fitch rates Italy AA- on its long-term debt. Standard & Poor’s has a A+ rating and Moody’s classes the country at Aa2. All the agencies have Italy on a stable outlook. (Additional reporting by Valentina Za; Editing by Ron Askew)

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