Moody's downgrades Italy credit rating on debt, deficit concerns

Alicia Cross
October 22, 2018

The coalition government, which took office in June, has said it needs to increase spending to boost Italy's anaemic economy.

In its letter to the Tria, the European Union commission also noted that the budget plans had allocated for an increase in the government spending for 2019 at 2.7% whereas the European Union had only allocated an increase in the government spending of only about 0.1%.

Reviewing the Italian budget plans, the commission could decide to send warnings or to send the budget back to Rome for changes by 29 October.

Ahead of the meeting, Italy had on Wednesday insisted it would not budge on the budget, putting Rome squarely on course for a clash with Brussels.

The populist government of italy has pledged on Saturday to explain his budget 2019 strongly criticized in Brussels, while repeating his commitment to keep the country in the euro zone, during a press conference following a council of ministers. Italian bonds were closed at the time of the announcement.

Rome will now have until Monday to respond to the letter before the European Union begins the formal process to reject the budget.

The stable rating outlook from Moody's reflects the broadly balanced risks at the Baa3 rating level, the company said, noting that Italy still exhibits important credit strengths that balance its weakening fiscal prospects.

Tria for his part said Italy and Brussels had "different evaluations" of the situation, but added that he too looked forward to "a constructive dialogue".

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"Most of the government's spending increases are structural in nature, implying that they will be hard to reverse", Moody's wrote.

Luigi Di Maio, the head of the 5-Star Movement, said Friday that he was sure a solution would be found, adding "we will hardly let the government fall over an amnesty for whoever launders or self-launders money".

Italy's deficit is now projected at 2.4 percent of GDP, far higher than the 0.8 percent estimate given by the earlier center-right government.

Italy's government borrowing rose, with the yield on the benchmark 10-year bond on Friday hitting its highest level since 2013.

While Italy's deficit is well within the 3 percent limit laid out in treaties, the commission has demanded smaller gaps for Italy to bring down its debt load, the largest in Europe in absolute terms and second only to Greece's as a percentage of the economy.

The government's budget plan targets a decrease of the deficit to 2.1 per cent in 2020 and 1.8 per cent in 2021.

"I'm aware this is not the budget the Commission expected".

While Brussels has no real powers over countries' budgets, governments go to great lengths to avoid a reprimand because of the potential market implications it could have. "But what matters is not the sanction itself but the fact that there is a clear political conflict that the Commission can not and does not want to sweep under the carpet".

Other reports by Free-Prsite

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