July 30, 2012 / 6:46 PM / 7 years ago

UPDATE 1-Fitch cuts Naples ratings, outlook negative

MILAN, July 30 (Reuters) - Fitch Ratings cut long-term foreign and local currency ratings for the Italian city of Naples by one notch to ‘BBB’ on Monday, bringing them just two notches above junk status.

The outlook for the long-term ratings is negative, said the rating agency pointing to a weakening in the cash position of Italy’s third-largest city, at a time when the Italian government is reducing its subsidies to local entities as part of a wide-ranging austerity push.

The issue has been thrown into the spotlight as fears mount about Sicily’s financial health at a time when the budget problems of Spain’s regions are unnerving bond markets.

Analysts warn that the fiscal problems of local governments risk further undermining investor sentiment towards Italy, which is seen under threat were Spain to request a full bailout.

“The ratings could be further downgraded if the decrease in public subsidies was not offset by spending cuts and/or higher cash revenue generation,” Fitch said in a note explaining the rating action.

Naples’ financial debt hovered around EUR1.6bn in 2009-2011, or 120% of current revenue.

In particular, the rating agency underlined the difficulty Naples is faced with in collecting taxes and fines, with a rising level of receivables, some of which are considered doubtful by the rating agency.

Under a new rule introduced this month as part of the government’s austerity measures, a city must write down at least 25 percent of revenues that have been on its balance sheet for more than five years but which it has yet to cash in.

Revenues unlikely to be ever collected are estimated by Fitch to be more than double the 230 million euro expected by the city.

Earlier in July Fitch Ratings affirmed Italy’s long-term sovereign debt rating at ‘A-‘, averting the threat of aggressive forced selling by bond traders if the country had lost its only remaining single-A mark.

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