September 19, 2011 / 3:09 PM / 7 years ago

Italy austerity credit negative for local governments: Moody's

ROME (Reuters) - Italy’s austerity plan approved by parliament last week will hit the finances of the country’s regions and local governments and has negative implications for their credit ratings, Moody’s ratings agency said on Monday.

“These measures are credit negative for Italian (regional and local governments) since they add imminent pressure to already stretched budgets and introduce uncertainties on the allocation of powers and responsibilities to local governments,” Moody’s said.

The agency is reviewing the sovereign credit rating of the euro zone’s third-largest economy after putting it on negative ratings watch three months ago.

Moody’s noted the large contribution that regional and local governments will have to make to Italy’s effort to balance its budget by 2013, with a reduction of 3 percent of their annual budgets over the next three years.

It said planned revenue-enhancing initiatives, such as giving local and regional administrations more control over their own tax rates and allowing them to retain proceeds from tax evaders they unearth “will only partly compensate for austerity driven transfer cuts.”

Italy’s regional governors and mayors have held a series of protests against the planned reduction of around 16 billion euros in their funding over the 2012-2013 period.

The cuts will also hit Italian economic growth, Moody’s warned, because it will impair regional and local governments’ ability to make capital investments.

The agency gave a harsh assessment of Rome’s pledge to eliminate Italy’s 108 provincial governments, saying the uncertainty around the plan and the lengthy constitutional procedure required exceeded the possible benefits in terms of cost savings.

Moody’s put Italy’s sovereign rating of Aa2 on review for a possible downgrade on June 17, citing its weak economic growth prospects and the risk to its finances from rising interest rates.

Having originally given itself a 90-day time frame to complete that review, on Friday Moody’s said it may take another month “in light of the increasingly challenging economic and financial environment and fluid political developments in the euro area.”

Most analysts expect Moody’s to downgrade the sovereign rating by one or two notches, a prospect which last week hit the shares of banks with large holdings of Italian government debt as the original deadline for the review period drew to a close.

Analysts note that Italy’s near-term growth prospects have weakened since the review was launched and little has been done to help its medium-term outlook, while funding costs and contagion risks from the euro zone debt crisis have increased.

Italy has been hammered over the past two months by growing financial market concern over its combination of massive public debt, stagnant economy and political indecision.

Reporting by Gavin Jones; Editing by Hugh Lawson

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