December 5, 2016 / 9:53 AM / 3 years ago

Referendum defeat a new blow to Italy rating prospects: DBRS

LONDON (Reuters) - Ratings agency DBRS said on Monday that Italian Prime Minister Matteo Renzi’s imminent resignation after a crushing referendum defeat was negative for the country’s credit ranking, which is under threat of a downgrade.

DBRS’ A(low) rating on Italy is important for its beleaguered banks, because a downgrade would mean they would pay more for European Central Bank funding.

“This is certainly credit negative,” DBRS’ co-head of sovereign ratings, Fergus McCormick, told Reuters.

“We would expect less government stability and greater political uncertainty in the near term ... and this could affect investor appetite for bank equity in this period of very imminent restructuring and recapitalisation.”

Renzi’s constitutional reform was rejected by 59.1 percent of voters, a wider margin than had been expected. Most now expect an interim government to take charge, while early elections in 2017 might be more likely.

McCormick declined to say when the agency was likely to convene its committee to make its rating decision. DBRS had delayed a planned review until after the referendum and must conclude it by Feb. 3, 2017.

But he said the fate of Italy’s No. 3 lender Monte dei Paschi, trying to raise money from investors by the end of the month to avoid being wound down, was of “premier importance” to the country.

“Rules dictate that if this capital raising can’t be done, then there has to be some bail-in. The problem is that Italian shareholders own an enormous amount of Monte dei Paschi so that would increase the debt of many households and weigh further on the country’s low growth.”

DBRS has previously said that Italy’s growth rate, one of the lowest in the bloc, is the agency’s main concern.

That has now been dealt a new blow.

“Even with low oil prices, even with the liquidity from the ECB’s quantitative easing, even with a relaxation of fiscal austerity and with the depreciation of the currency, Italian GDP growth has been well below the euro zone average,” McCormick said.

“We find that to be very, very troubling indeed. Now with this development, we do not expect GDP growth to pick up. There is no reason this would pick up from the current level. This is credit negative.”

Reporting by John Geddie; editing by Marc Jones

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