Moody's Downgrades Italy's To Baa2 From A3, Negative Outlook - Full Text

Tyler Durden's picture

Just like Spain before everyone took the country to a Sub-A rating, Fitch is once again the decider. S&P has Italy at BBB+, and Now Moody's just took italy under A to Baa2; only Fitch is still at A-, outlook negative. When all three rating agencies go sub A, there is a 5% ECB repo hike as we explained back in April.

From Moody's

Frankfurt am Main, July 13, 2012 -- Moody's Investors Service has today downgraded Italy's government bond rating to Baa2 from A3. The outlook remains negative. Italy's Prime-2 short-term rating has not changed.

The decision to downgrade Italy's rating reflects the following key factors:

1. Italy is more likely to experience a further sharp increase in its funding costs or the loss of market access than at the time of our rating action five months ago due to increasingly fragile market confidence, contagion risk emanating from Greece and Spain and signs of an eroding non-domestic investor base. The risk of a Greek exit from the euro has risen, the Spanish banking system will experience greater credit losses than anticipated, and Spain's own funding challenges are greater than previously recognized.

2. Italy's near-term economic outlook has deteriorated, as manifest in both weaker growth and higher unemployment, which creates risk of failure to meet fiscal consolidation targets. Failure to meet fiscal targets in turn could weaken market confidence further, raising the risk of a sudden stop in market funding.

At the same time, Moody's notes that the sovereign's current Baa2 rating is supported by significant credit strengths relative to other euro area peripheral economies, including (1) maintenance of a primary surplus, (2) large and diverse economy that can act as an important shock absorber in the current crisis, and (3) substantial progress on the structural reforms which, if sustained in the coming years, could improve the country's competitiveness and growth potential over the medium-term.


The first key driver underlying Moody's two-notch downgrade of Italy's government bond rating is Italy's increased susceptibility to event risk. As discussed in a recent Special Comment, "European Sovereigns: Post-Summit Measures Reduce Near-Term Likelihood of Shocks, But Integration Comes at a Cost", Moody's believes that the normalisation of sovereign debt markets could take a number of years, with political event risk and the risk of sovereign defaults increasing as the crisis persists. Moreover, events in Greece have deteriorated materially since the beginning of 2012, and the probability of a Greek exit from the euro area has materially increased in recent months. Likewise, an increased likelihood that Spain might require further external support against the backdrop of economic weakness and increased vulnerability to a sudden stop in funding. In this environment, Italy's high debt levels and significant annual funding needs of €415 billion (25% of GDP) in 2012-13, as well as its diminished overseas investor base, generate increasing liquidity risk.

The 29 June euro area summit advanced the idea of allowing European Financial Stability (EFSF) and European Stability Mechanism (ESM) funds to be used to stabilise sovereign funding markets, which implicitly recognises that these tools may be necessary to sustain Italy's access to affordable credit. However, given the size of the Italian economy and the size of the government's debt load, there is a limit to the extent to which these support mechanisms can be used to backstop such a large, systemically important sovereign. However, Italy benefits from its systemic importance for the euro area, giving it leverage in the political process as reflected in the results of the 29 June euro area summit.

The second driver of today's rating action is the further deterioration in the Italian economy, which is contributing to fiscal slippage. Moody's is now expecting real GDP growth to contract by 2% in 2012, which will put further pressure on the country's ability to meet its fiscal targets, which were scaled back when the country published its Stability Programme in April. Although its goal of achieving a structural budget balance in 2013 has not changed, the government now expects to achieve a nominal balanced budget in 2015, two years later than it expected when adopting a package of fiscal adjustment measures in December 2011. More broadly, Moody's believes that Italy's fiscal goals will be challenging to achieve, particularly given the more adverse macroeconomic environment.

The current government's strong commitment to structural reforms and fiscal consolidation has moderated the downward pressure on Italy's government bond rating. Moody's recognises that the government has proposed, and is legislating, a reform programme that has the potential to materially improve Italy's longer-term growth and fiscal prospects. As part of this programme, the authorities implemented three fiscal consolidation packages, strengthened the pension system, and approved a structural balanced budget rule that will be effective from 2014 onwards. Moreover, in early July the government approved additional spending cuts in order to postpone a VAT hike that was due to take effect in October 2012, and which would have placed additional downward pressure on domestic demand.

The negative outlook reflects our view that risks to implementing these reforms remain substantial. Adding to them is the deteriorating macroeconomic environment, which increases austerity and reform fatigue among the population. The political climate, particularly as the Spring 2013 elections draw near, is also a source of implementation risk.


Italy's government debt rating could be downgraded further in the event there is additional material deterioration in the country's economic prospects or difficulties in implementing reform. A further deterioration in funding conditions as a result of new, substantial domestic economic and financial shocks from the euro area crisis would also place downward pressure on Italy's rating. Should Italy's access to public debt markets become more constrained and the country were to require external assistance, then Italy's sovereign rating could transition to substantially lower rating levels.

A successful implementation of economic reform and fiscal measures that effectively strengthen the growth prospects of the Italian economy and the government's balance sheet would be credit positive and could lead to a stable outlook. Upward pressure on Italy's rating could develop if the government's public finances were to become less vulnerable to volatile funding conditions, should that be accompanied by a reversal in the upward trajectory in public debt and the achievement of lower debt levels.


As a consequence of the rating action on the sovereign, Moody's has also lowered the maximum rating that can be assigned to a domestic issuer in Italy, including structured finance securities backed by Italian receivables, to A2 from Aaa. The lower ceiling reflects the increased risk of economic and financial dislocations. The short-term foreign currency country and deposit ceilings remain Prime-1.

Italy's new country ceiling reflects Moody's assessment that the risk of economic and financial instability in the country has increased. The weakness of the economy and the increased vulnerability to a sudden stop in funding for the sovereign constitute a substantial risk factor to other (non-government) issuers in Italy as income and access to liquidity and funding could be sharply curtailed for all classes of borrowers. Further deterioration in the financial sector cannot be excluded, which could lead to potentially severe systemic economic disruption and reduced access to credit. Finally, the ceiling reflects the risk of exit and redenomination in the unlikely event of a default by the sovereign. If the Italian government's rating were to fall further from its current Baa2 level, the country ceiling would be reassessed and likely lowered at that time.

The principal methodology used in these ratings was Sovereign Bond Ratings Methodology published in September 2008. Please see the Credit Policy page on for a copy of this methodology.

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Id fight Gandhi's picture

That's a lot. Did they forget to bribe?

valley chick's picture

Yes it is BandGap...Been waiting for Italy to play out. 

knukles's picture

Whazza matta whazza matta whazza matta matta fazoooo
Whazza matta whazza matta whazza matta matta fazoooo
Whazza matta whazza matta whazza matta matta fazoooo

Whazza matta whazza matta whazza matta matta fazoooo
Whazza matta whazza matta whazza matta matta fazoooo
Whazza matta whazza matta whazza matta matta fazoooo

Be an Italian
Wear Grease
Ba dump ba dump ba dump ba dump
Watch your rating
Slide to your feet
Ba dump ba dump ba dump ba dump

de de de dee
de de
deeedle deddle le de

I can a no waita for August!
Another montha offa!


TNTARG's picture

Banksters are destroying Italy, land of creative and loving people, capable to get beauty essence from any material...

See 1984. It's how the future looks alike. I mean it. Look at the Michelangelo's David. Listen Verdi, listen Albinoni's adagio, visit Firenze's Santa Maria del Fiore, walk Venice, admire Firenze's Uffici and so on...

They've destroyed Greece too.

Infra-human's banksters are barbarizing everything and we do nothing. Maybe we deserve it.

Laughing? Wait and see. We'll all be so sorry, so soon...


unununium's picture

Then again, banksters had little influence over famous and "virtuous" Italians like Octavian, Nero, Claudius, Commodus, and Caracalla.

rocker's picture

Goldman has insiders their too.  Should be good for at least 20 S&P points.

Buck Johnson's picture

Bingo!!!!  It sure is accelerating and the MSM is trying to put a good spin on everything.  The reason why the EU hasn't dissolved is two fold.  They won't get their money back from the loans made and investments made in euros.  And two, the US must have told the govt. in private that their banks and insurance companies won't pay on the insurance for the derivatives and bonds.

1000pips's picture

Be prepared for some kinda of 'God Save' for the EURO.  Watch them take it back to 1.30--they have done this time after time...

zero19451945's picture

Nobody cares about ratings anymore. If they did, the Euro wouldn't exist and the Dow wouldn't be above 12,000. 


chump666's picture

The market is only supported by cash-less, volume dry HFTs, those bits of junk are keeping the 100ma bid.  Once a flood of SHTF news hits the wires, 2010 flash crash will look like nothing.

fonzannoon's picture

Chump what is going to be tshtf news? My guess is they extend the bush tax cuts, do away with the automatic spending cuts and eliminate the debt ceiling. Then the ratings agencies applaud the pro growth agenda. So whats the bad news I am missing?

Ineverslice's picture

Moody's downgrades Scranton, PA.

No one cares.

Moody's- Go pump urself :)

Conman's picture

Well EU isn't using ratings agencies anymore. Spiderman towels and little statuettes of the leaning tower of Pisa are AAA+++ collateral.

BTW BTFD dummy! Rally on, every time a sovereign gets downgraded i 've seen a ramp job the next day.

fuu's picture

Sheep go baa as well.

Itch's picture

Its not like Moodys, they usually wait until everyones in a good mood.

azzhatter's picture

Geeez they've got all that solid collateral too

Meesohaawnee's picture

that should be good for 10 green ticks in the ES...oh ben!!.. Ramp it up!! Bullish!

Bunga Bunga's picture

No news, priced in, better than expected, good for stocks.

Not Too Important's picture

The British will come to the rescue with their excellence in efficient planning:

Oh, wait, they fucked up the security for the Olympic Games. OK, increase their fees:

Isn't this how it works? The worse you do, the more you're paid? The British are geniuses! Perfect to fix the EU crisis . . .

Ted K's picture

It's a good thing S&P, Moody's and the other ratings agencies trying to figure out how to twist a 1 inch dick back around to their own anus don't manufacture the emergency eject function for USAF fighter jets.  The downed fuselage would be rusting on a USAF jet lost in the New Mexico desert over 5 years, as a spring popped loose a slow speaking robot voice would then emit "danger approaching, danger approaching".

YesWeKahn's picture

Criminal rating agency downgrade bancrupt country. Meaningless.

vote_libertarian_party's picture

...aaaaand US futures are up on the great news and EURUSD is about unchanged

q99x2's picture

Whose paying the ratings agencies for the downgrades?

This is deliberate and another indication that the banksters are on schedule toward full implosion implementation.

I did not get pepper sprayed at Santa Monica College today although my classmates became concerned when a huge Darth Vader astronaut like policeman entered the classroom. The student he was after had already fled. Today was a good day.

Cast Iron Skillet's picture

did the scanner reveal a couple of hash molecules on that student, or something?

Bobportlandor's picture

I went to SMCC two years is Foster Freeze still across the street? Great fish sandwiches and chips and loved their chocolate malts.

americanspirit's picture

But let's not forget that the Bungaman cometh in 2013. That ought to be good for a ratings upgrade.

Joe A's picture

Bungaman said he wants to take Italy out of the Euro and go back to the Lira. Italy had no right to be part of the Euro in the first place. Going back to the Lira might just be a good idea. The problem with the Euro (among others) is that it did not make provisions for countries to go back to their original currencies in order to fix their problems. This all under the banner of 'harmony through unity' which so dramatically failed in the USSR and Yugoslavia.

Whatsoever's picture

being drunk ?


Italy had no right to go to the Euro ?

Italy has the biggest surplus of all G7 (3,1% in 2012 - > 4% in 2013)

Being retard doesn't imply the right to sit there and post whatever is coming to the ... yes to what ?

Joe A's picture

You call someone who writes something a retard. That makes you a retard yourself. Italy lied about its financial figures when the Euro was created. Germany knew that and didn't want Italy to join but the French pressured the Germans to accept Italy into the Euro. Italy also promised back then (I am not talking about 2012) to reform their economy. Three months later they said ' nah'. Unlike you, I allow retards like you to write whatever is coming to the ... yes to what? Your ass?

RobotTrader's picture

This news is a guarantee the global investors will once again:


1) Buy more U.S. Treasuries

2) Buy more California and New York Muni-Bonds

3) Buy more blue chip Dow stocks like JNJ, MRK, PG, WMT

4) Dump gold

5) Short an even higher amount of mining shares

LongBalls's picture

I agree with number 1 and I don't have the energy to tell you how wrong you are about the rest.

luckylongshot's picture

The level of corruption in both the ratings agencies and the banks has reached the point where , perhaps in fear, ratings agencies are starting to acknowledge what everyone else could see was obvious years ago.

TrainWreck1's picture

What is needed is a double-secret downgrade.


Whatsoever's picture

oh oh,

moodily did not succeed. Thirdworld cannot beat ancient romans.

Is it, because they do not know the alphabet ?