Moody's Puts Italy's Aa2 Rating On Downgrade Review, EUR Slides, And A Bonus Report From SocGen: "How Vulnerable Is Italy?"
Trust Moody's to come up with the Friday afternoon bomb. EURUSD slides on the news, which sends the 100% correlated stocks plunging.
Full text from Moody's:
Frankfurt am Main, June 17, 2011 -- Moody's Investors Service has today placed Italy's Aa2 local and foreign
currency government bond ratings on review for possible downgrade,
while affirming its short-term ratings at Prime-1.
The main drivers that prompted the rating review are:
(1) Economic growth challenges due to macroeconomic structural weaknesses
and a likely rise in interest rates over time;
(2) Implementation risks surrounding the fiscal consolidation plans that
are required to reduce Italy's stock of debt and keep it at affordable
(3) Risks posed by changing funding conditions for European sovereigns
with high levels of debt.
Moody's review will evaluate the weight of these growing risks in light
of the country's high rating but also relative to some credit-strengthening
trends that have been observed in recent years and are expected over the
coming years, such as improved fiscal governance, lower budget
deficits and a modest economic recovery.
RATIONALE FOR REVIEW
First, the Italian economy faces growth challenges in an environment
characterized by long-term structural impediments to growth and
potentially rising interest rates. Structural economic weaknesses
-- mainly low productivity and important labour and product market
rigidities -- have been a major impediment to growth in the last
decade and continue to hinder the economy's recovery from the severe
recession it experienced in 2009. Italy has so far only recovered
a fraction of the nearly seven percentage points in GDP that it lost during
the global crisis, despite low interest rates, which are likely
to rise in the medium term. Growth prospects for the Italian economy
in the coming years will be a crucial factor that will determine the government's
revenues and the achievement of fiscal consolidation targets.
Second, there are implementation risks to the fiscal consolidation
plans that are required to reduce Italy's stock of public debt to
more affordable levels. Against a backdrop of rising interest rates
and weak economic growth, the government may find it difficult to
generate the primary surpluses that are needed to place the public debt-to-GDP
ratio and the interest burden on a solid downward trend. The adoption
of additional conservative fiscal policies may prove more difficult in
the near future because the current government's electoral support
is weakening, with the government facing challenges in gaining public
approval for its policies. For example, the government's
recent energy and water supply proposals were rejected by popular vote.
Third, the fragile market sentiment that continues to surround European
sovereigns with high levels of debt poses additional risks for Italy.
The continued stability of market demand for Italy's debt is uncertain
at current yields. Although future policy actions within the euro
area could reduce investors' concerns and stabilize funding costs,
the opposite is also possible. In any event, going forward,
investors appear likely to differentiate more among euro area sovereign
borrowers than they did prior to the financial crisis, to the disadvantage
of euro area countries with higher-than-average debt burdens,
FOCUS OF RATINGS REVIEW
Moody's review of Italy's sovereign rating will focus on the growth prospects
for the Italian economy in coming years, and particularly the prospects
for a removal of important structural bottlenecks that could hinder a
stronger economic recovery in the medium term. The review will
also examine the government's ability to achieve ambitious fiscal
consolidation targets and to implement further plans to generate substantial
primary surpluses in the medium term. This will include an analysis
of the vulnerability of the Italian government debt trajectory to a rise
in risk premia, as well as the options for the government to react.
The government's new fiscal plan, which is expected to be
announced shortly, will be considered during the review.
In addition, any broader developments across the euro area,
in particular with regard to the resolution of the euro area debt crisis
and its impact on funding costs, could be important determinants
of the outcome of Moody's rating review
PREVIOUS RATING ACTION AND METHODOLOGY
Moody's last rating action affecting Italy was implemented on 15 May 2002, when the rating agency upgraded Italy's Aa3 government bond ratings to Aa2 with a stable outlook. The rating action prior to that was taken on 3 July 1996, when the rating agency upgraded Italy's A1 government bond ratings to Aa3.
And now that the topic of Italy is so critical, here is SocGen's recent must read: "How Vulnerable is Italy"