Italy Back In Spotlight After S&P Says One In Three Chance It Will Cut Ratings In Next 24 Months

Tyler Durden's picture

From S&P, which explains why Italian banks have dominated Sigma X trading in the last few days:

Despite Announced Austerity Measures, Italy Still Faces Substantial Risks To Debt Reduction

  •     The Italian government has introduced additional fiscal measures for 2011-2014.
  •     Italy's weak growth outlook remains the key downside risk to the government's debt reduction plan.

LONDON (Standard & Poor's) July 1, 2011--Yesterday, the Italian government introduced additional fiscal austerity measures that aim to reduce the general government deficit by €47 billion (3% of 2011 GDP) by 2014. Despite these measures, however, we believe substantial downside risks to the government's debt-reduction plan remain, primarily due to Italy's weak growth prospects.

Several of the announced measures, in our view, could indirectly benefit Italian competitiveness: in particular, cuts to higher-bracket public sector wages and the planned rationalization of Italy's complex system of tax deductions. If implemented, adjusting the retirement age in 2014 rather than in 2015 as originally planned would reinforce our opinion that Italy's age-related contingent liabilities are among the lowest in Europe. We also view the agreement between the employers' confederation and Italy's three main labor unions to decentralize wage-setting as an important first step toward promoting wage flexibility.

Nevertheless, in light of Italy's weak growth (per capita GDP growth averaged minus 0.9% between 2005 and 2011) it is our opinion that far more substantial microeconomic and macroeconomic reforms will be required to incentivize private investment and match wage levels with productivity. Without such measures, we believe Italy's economic potential will not be realized. This will imply insufficient wealth creation to deliver meaningful declines in the general government's debt-to-GDP ratio, which was a high 119% at end-2010. As a consequence, we continue to hold the view that there is an approximately one-in-three likelihood that the ratings on Italy could be lowered within the next 24 months, as reflected in our negative outlook.

On the fiscal package itself, we view the latest austerity plans as generally credible, particularly the measures that aim to contain the public sector wage bill and pension spending. We believe, however, that the government could be overly optimistic about how effective its fight against tax evasion will be. We anticipate the government will likely retain its tight fiscal stance and will respond to potential future fiscal slippage with additional measures. The government has also introduced a tax reform package, which includes the simplification of personal income, service, and transaction taxes, while raising VAT by one percentage point.

The negative outlook on Italy reflects Standard & Poor's view of certain downside risks to the government's debt-reduction plan over 2011-2014, and represents our belief that there is approximately a one-in-three likelihood that the ratings could be lowered within the next 24 months. In our view, these downside risks will primarily stem from weaker growth than our current assumption of average GDP growth of 1.3% during 2011-2014. In addition, we believe that extended political gridlock could contribute to fiscal slippage.

If one or a combination of these risks materializes, Italy's general government debt burden could stagnate at the current high level. In this case, we may lower the long- and short-term ratings on Italy. On the other hand, if the government manages to gather political support for the implementation of competitiveness-enhancing structural reforms, paving the way for higher economic growth and faster reduction of its debt burden, the ratings could remain at the current level.

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Franken_Stein's picture


So we will see the same action in all the other PIIGS that we saw in Greece already.

How long will this Euro crisis take and need to fully play out ?

It's getting boring.


If this drama continues for another 5 years, I'm gonna demand my money back.

This plot is so boring and the outcome already clear and known in advance.


serf86's picture

Everyone will dance until the music stops.  Because when it stops, the pause will not refresh

Incubus's picture

Just bringing the water to a boil very slowly.  Oligarchical heads might roll if they rush things.



SheepDog-One's picture

OK so the water has been boiling for a year already. So now what?

Incubus's picture

I don't think the water is boiling, yet.  You can consider it "boiling" when there's a breakdown of supply chains & infrastructure and a lot of people start dying due to that and violence.


Ghordius's picture


I have to warn all readers: Italy is the least understood economy of the Eurozone. Bet on any changes in the Italian Sovereign Bond market at your own peril.

- the submerged economy is huge
- Italian politics are incomprehensible for most foreigners
- stock markets are tiny
- family-owned small & medium companies are the norm
- GDP numbers are underestimated (see submerged economy) & this does not bother anyone
- regional differences are huge (some regions are like Greece in all things, others are more like Bavaria)
- the banking system resembles more the German one (which is also often misunderstood) than any other
- Italy has a debt level near 100% since decades
- Italians used to own 90% of the debt, now thanks to (mostly French) foreign banks they are down to 50%

- one little factoid which boggles all minds unaccustomed with all things Italian: percentage of houses with a mortgage = 5%

entendance's picture

Italy will be th next to fall, despite what you (and mr.bean-draghi) think.

SheepDog-One's picture

Much to 'all is well, who's winning the NFL' americans shock and dismay, US is next to fall.

YouTube - 'US going down next after Greece'

Ghordius's picture

Your comments are just crap. Begone, little troll, or come back with arguments.

Bob's picture

Here's a thought: If the ratings agencies are not simply hired thugs of the banksters--still--why are they stopping at these threats to the taxpayers of debt-issuing sovereigns?  Why don't they take the next step and point out which banks that are holding these debts will also be "downgraded" if they are "forced" to downgrade the sovereigns?

jkruffin's picture

24 months?  WTF?  Why even comment then? Does the S&P or Moody's think they are gaining credibility back all of a sudden?  Hell, in 24 months, Bernanke will have the S&P at 2200....Geithner, while no longer Treas Sec, will owe more taxes he refuses to pay again.

Greece will have been thru bailout #15 by then....Obama will have been re-elected promising more hope and change...

gametracker's picture

24 months?  WTF?  Why even comment then?


Also they say it's a 1 in 3 chance, so in other words there's a 67% chance that they won't be downgraded over the next 2 years.

This fabricated non-news is like all the rest. It's cover for a majoer banks trading position.

News isn't news anymore. Just like the fabricated corn news yesterday, it's all released only to help the banks/masters in a trade. I'm sure they entered corn yesterday/today and they'll be news in a week to help that trade.

MachoMan's picture

If you can quantify the likelihood of watershed events that lead to downgrades, then why can't you downgrade now based upon those calculations, in accordance with the chances of said watershed event(s)?

gametracker's picture

The fabricated story says that Italy probably WON'T (67% chance) be downgraded within the next 2 years. With the Euro heading to it's death, this should be interpreted as great news for Italy, right?



oogs66's picture

Italy CDS 10 wider today.  Sovereigns as a whole underperformed the credit market rally yesterday and are heavy again today.   Once again the celebration of the bailout seems to be impacting the markets least affected ES, rather than those most affected PIIGS.


SheepDog-One's picture

Timelines in these articles like 'This will happen within 24 months' you can be sure it will happen in the next couple weeks.

Silverhog's picture

24 months? You think this world pile of stinking toxic debt will sit still until then? I'll be surprised if we don't hit the crapper in 6 months.

Broomer's picture

Italy has a lot of gold, I wouldn't worry too much about them.

I'd love to be able to stockpile 500 lire silver coins again.

bobbydelgreco's picture

this is big when italy's time comes they won't bend over like the greeks (sorry) then the real fun begins

Ghordius's picture

this would probably be IF the French banks get in trouble and fire sale Italian bonds

FunkyOldGeezer's picture

Only 5% have mortgages? That would mostly be the Brits, Swedes, Germans in Tuscany, then.

Italy has lotsa Gold too.

Hmmm, methinks Spain is a much bigger problem and much nearer to collapse.

taca's picture

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