Moody's Downgrades Italy From Aa2 To A2, Negative Outlook - Full Text Of Three Notch Downgrade

Tyler Durden's picture

And here we go again. Ironically, this is nothing. Wait until S&P, which just telegraphed very loudly the next steps earlier, puts France on downgrade review...

Moody's downgrades Italy's government bond ratings to A2 with a negative outlook
 
Prime-1 ratings affirmed
 
Frankfurt am Main, October 04, 2011 -- Moody's Investors Service has today downgraded Italy's government bond ratings to A2 with a negative outlook from Aa2, while affirming its short-term ratings at Prime-1. The rating action concludes the review for downgrade initiated by Moody's on 17 June, 2011.
 
The main drivers that prompted the rating downgrade are:
 
(1) The material increase in long-term funding risks for euro area sovereigns with high levels of public debt, such as Italy, as a result of the sustained and non-cyclical erosion of confidence in the wholesale finance environment for euro sovereigns, due to the current sovereign debt crisis.
 
(2) The increased downside risks to economic growth due to macroeconomic structural weaknesses and a weakening global outlook.
 
(3) The implementation risks and time needed to achieve the government's fiscal consolidation targets to reverse the adverse trend observed in the public debt, due to economic and political uncertainties.
 
The downgrade reflects the weight of these growing risks relative to some positive credit attributes. These include a lack of significant imbalances in the economy or severe pressure on private financial and non-financial sector balance sheets, as well as the actions undertaken by the government over the summer. Moody's notes that the size of the rating action is largely driven by the sustained increase in the country's susceptibility to financial shocks due to a structural shift in market sentiment regarding euro-area countries with high debt burdens. A country's susceptibility to shocks is a key factor under Moody's sovereign methodology.
 
The negative outlook reflects ongoing economic and financial risks in Italy and in the euro area. The uncertain market environment and the risk of further deterioration in investor sentiment could constrain the country's access to the public debt markets. If such risks were to materialise and the long-term availability of external sources of liquidity support were to remain uncertain, the country's rating could transition to substantially lower rating levels.
 
RATIONALE FOR DOWNGRADE
 
The downgrade stems from three closely related drivers:
 
1) The fragile market sentiment that continues to surround euro area sovereigns with high levels of debt implies materially increased financing costs and funding risks for Italy. The country is a frequent issuer with refinancing needs of more than EUR200 billion in 2012.
Although future policy actions within the euro area could reduce investors' concerns and stabilise funding markets, the opposite is also increasingly possible. Even if policy actions were to succeed in the short term in returning some degree of normality to euro area sovereign debt markets, the underlying fragility and loss of confidence is deep and likely to be sustained. As indicated by the A2 rating, the risk of default by Italy remains remote. Nonetheless, Moody's believes that the structural shift in sentiment in the euro area funding market implies increased vulnerability of this country to loss of market access at affordable rates that is incompatible with a 'Aa' rating. Moreover, the preponderance of downside risks and the potential for rapid rating transition which those risks imply are not compatible with a rating at the top end of the 'A' range. The repositioning of Italy's government bond rating to A2 reflects Moody's judgment of the balance of long-term risks facing the Italian sovereign. It is consistent with Moody's broader reassessment of sovereign risk in the euro area, focusing on member countries that are more susceptible to confidence-related shocks due to high public debt exposure and/or large fiscal imbalances.
 
2) The Italian economy continues to face significant challenges due to structural economic weaknesses. These problems -- mainly low productivity and important labour and product market rigidities -- have been an impediment to the achievement of higher potential growth rates over the past decade and continue to hinder the economy's recovery from the severe recession it experienced in 2009. These structural impediments to economic growth cannot be removed quickly. The government's reform plans have only just started to address some of these structural challenges, and they need to be implemented efficiently. Moreover, moderate medium-term growth prospects for the Italian economy have been further revised downwards due to potential adverse effects of a weakening European and global growth outlook. Economic growth will be a crucial factor determining the government's revenues, the achievement of fiscal consolidation targets and, ultimately, its debt trajectory.
 
3) Finally, there is increasing uncertainty for the government to achieve fiscal consolidation targets. Since more than half of the consolidation measures are based on government revenue growth, the plans are vulnerable to the high level of uncertainty around economic growth in Italy and elsewhere in the EU. Moreover, political consensus on additional expenditure cuts can be difficult to achieve. As a consequence, the government may find it challenging 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. Moody's expects Italy's public debt-to-GDP ratio to reach 120% at the end of this year, up from 104% at the start of the global crisis. As well as posing a risk to Italy's financial strength, which is a key consideration under Moody's sovereign methodology, failure to achieve fiscal and debt targets could increase the country's susceptibility to financial market shocks.
 

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Frog-And-Toad's picture

Remember that whole flash rally thing... How's that going to hold up tomorrow after Asia & Europe get stompped on tomorrow?

KenShabby's picture

That cat had springs on.

Frog-And-Toad's picture

That cat must be bouncing on a frictionless surface... This is unBEARable

Snidley Whipsnae's picture

Are the trains running on time? Thats the big deal in Italy... If the trains run on time all is well. If not, look for new leadership... Ill Douchbag 2...Save us!

 

Hansel's picture

This was already priced in.  Do you think the market considered Italy Aa2?  /devil's advocate

Buck Johnson's picture

It won't, I was surprised it ended positive after leaving for work seeing that the Dow was -200 and then looking to see it ended positive 150.  This is desperation at it's finest.  The bank in Belgium which their where very very quiet rumors about came into being this week about needing another bailout and then a rumor of a good bank bad bank.  The whole system can't have any of these links go bust, because if it does it takes out all the rest and/or the rest will be everyone for themselves and a mad scramble to the exits.  And also to whatever assets they can steal and borrow.

GeneMarchbanks's picture

Now I see why we rallied! Makes sense. I swear, at this point what we need is a ZH hedgefund to go around and bring this bullshit to a stop. Tyler as manager.

traditionalfunds's picture

They often downgrade in waves. Wonder who is next.

& if the squeeze can hold.

 

 

CapitalistRock's picture

Doug Kass isn't going to like that.

rocker's picture

Doug Kass is a worthless asshole pimp for CNBC.  He said the lows were in for the year. Wrong.

Doug Kass said Japan's lows were in after the meltdown. Wrong.

Doug Kass said Gold was done going up when it was 1600 going on to 1900. Wrong Again.

Doug Kass is always wrong.  Cramer is his best friend. Guess it rubs off. Eh. 

Vincent Vega's picture

Can't the Europeans just start a "bad bank" and off load all of Italy's debt to it?

rocker's picture

We already have a "Bad Bank".

It is called  "The FED"

The FED already owns all the bad assets from American Banks and Foreign Banks alike.

Bernanke said, "I will not monetize"    What a joke. No Wonder there are Protest on Wall Street.

GenX Investor's picture

It is just another hurdle to get over before the DOW hits 13,000

kaiserhoff's picture

Greek bonds and extended warranties!  How can I lose?

                                              Homer Simpson

joemayo's picture

The shares crash, hopes are dashed.  People forget.

mayhem_korner's picture

 

 

Italy - toast.  Spain - toast.  France - toast.  UK - toast.  Who the hell's going to win the World Cup in '14?

GenX Investor's picture

Don't know, but you made me hungry for breakfast.

Iriestx's picture

Vegemite is good on toast.

GeneMarchbanks's picture

Aussies prolly. Enjoy the vegemite you sick beast.

scatterbrains's picture

Good I hope we've shaken off the last of the weak ass bears today. Lets take this bitch back down again like a knife through butter.

GenX Investor's picture

The weak bears are the ones you see talking on CNBC about what to do in the market.  They are more thinly capitalized than a Greek Bank.

Edward Fiatski's picture

And the dominoes are off... Enjoy European open tomorrow. U.S. 'investors' are dumb as fuck, I bet you anyone trading the DAX hasn't and will not hear of this FT story.

Finnykins's picture

Bullish spaghetti meat balls and crude comments right?

qussl3's picture

Wow that was fun.

CapitalistRock's picture

Flash rip. We need an investigation to find out who is to blame.

GenX Investor's picture

Tune into FAST MONEY in 20 minutes on CNBC to find out...

Pretorian's picture

This was timed exactly to short squeeze with reason. So we got good news then margin call then back where we were and no complains because we have excuse.Iluminati.

 

stacking12321's picture

hey, you can't say illuminati in a public forum.

fnord.

BlackSea's picture

Shouldn't they downgrade gold first? After all, it's not backed by anything...

Belarus's picture

And the SEC with be immediately investigating this move for wait for it......S + P finally doing their jobs. What a racket this whole thing has become. At least the new CEO at S + P isn't afraid to do his job. He'll be gone though, in 3....2.....1....

Ruffcut's picture

Fuck Moodys and their perpetual bullshit. A big group of useless cunts.

Edward Fiatski's picture

Went long into close? :)))

Harlequin001's picture

' A stitch in time gathers no moss!'

PicassoInActions's picture

Some1 has to explain in plain English how the rumor squeeze works.

So , let's say FT comes with a msg that some politicians are masturbating and suddenly all at once are reversing positions? Is the actions are coordinated? Some1 gives a command to reverse and all do the same? Is it like a web of viruses? That's the p[art i don't get it. I understand HFT are fucking every1 else but how does it coordinate with so many hedge funds and big investing houses in a matter of seconds? It has to be group thinking or some kind of mechanism to synchronize all that bs in a such a short time.

Am i missing something?

mayhem_korner's picture

So , let's say FT comes with a msg that some politicians are masturbating and suddenly all at once are reversing positions?

Thanks for that image...excuse me while I go wash my eyes out with Clorox...

Harlequin001's picture

Basically it's just a bullshit excuse for the FEd et al to hide the fact that they just interfered with the market...

faustian bargain's picture

Golly, that only took them 4 months to complete.