Italy Expected To Cut Growth Forecasts Further
Even though Europe is closed, and the requisite ES ramp appeared on cue just as expected, Reuters has released some news which will put the Risk Off trade solidly back on the books, after it announced that "Italy will shortly cut its growth forecasts for this year and 2012 to bring them more into line with those of independent bodies, but the prospects for public finances have improved due to an increase in value added tax, government sources told Reuters on Monday." It continues: "A government forecasting document to be published in the next few days following the austerity plan approved by parliament last week will cut the 2011 growth forecast to 0.7 percent from 1.1 percent and lower the 2012 forecast to "1 percent or below" from 1.3 percent, the sources said." Someone who will certainly be very unhappy with this news is Moody's which is already delaying cutting Italy (and said last week it will have to do something within the month), but this will make any additional delays impossible, as well as push the rating agency to trim the country's credit rating by more than just one notch.
Another report from Reuters underscores the tough place Moody's finds itself in:
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".
Needless to say, a teetering Eurozone will not be happy with the additional headline risk. Look for added pressure on the EURUSD as a result once this news start getting processed by the algos.
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