Moody’s Cuts Italy Rating After S&P on Growth Outlook

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October 04, 2011, 6:43 PM EDT By Lorenzo Totaro

(Updates with Berlusconi comment in the fifth paragraph. See EXT4 for more on the European debt crisis.)

Oct. 4 (Bloomberg) -- Italy’s credit rating was cut by Moody’s Investors Service for the first time in almost two decades on concern the government will struggle to reduce the region’s second-largest debt amid chronically weak growth.

Moody’s lowered Italy’s rating three levels to A2 from Aa2, with a negative outlook, the New York-based company said in a statement today. The action comes after Standard & Poor’s downgraded Italy on Sept. 20 for the first time in five years. Italy was last cut by Moody’s in May 1993.

Italy gave final approval last month to a 54 billion-euro ($72 billion) austerity plan aimed at balancing the budget in 2013 that convinced the European Central Bank to buy the nation’s bonds. While the purchases initially brought down bond yields by about 100 basis points, Italy’s borrowing costs remain near record highs because of euro-area debt crisis contagion.

“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,” Moody’s said in the statement. “Although future policy actions within the euro area could reduce investors’ concerns and stabilize funding markets, the opposite is also increasingly possible.”

Moody’s decision “was expected,” Prime Minister Silvio Berlusconi’s office said in an e-mail today. “The Italian government is working with the utmost commitment to meet its budget targets.”

The yield on Italy’s 10-year notes was at 5.49 percent today, pushing the difference investors to hold Italian bonds instead of benchmark German bunds to 376 basis points. The cost of insuring Italian debt against default has more than double the level at the start of the year.

Italian Politics

Italy joined Spain, Ireland, Portugal, Cyprus and Greece as euro-region countries whose credit rating has been cut this year. Unlike Ireland and Portugal, which followed Greece in seeking bailouts from the European Union and the International Monetary Fund, Italy had until this summer managed to skirt the worst of the fallout from the debt crisis.

The reasons for the downgrade include “increased funding risks for euro area sovereigns in general, such as Italy, with high levels of public debt,” Alexander Kockerbeck, a Frankfurt- based sovereign debt analyst with Moody’s, said in an interview today. He also cited the risk of slower growth “due to macroeconomic structural weaknesses, and on top of that, a weakening global growth outlook.”

Today’s downgrade by Moody’s may aggravate a volatile political situation. Berlusconi, battling to keep his ruling coalition together, faces four trials and calls from Italian employers, his long-time backers, to step down after a decade of virtually no economic growth undermined debt reduction. Italy’s debt of about 120 percent of gross domestic product is second in the region only to Greece.

S&P in May and Moody’s in June warned that they may downgrade Italy, saying the government may miss fiscal targets. Moody’s extended its review of Italy for one month on Sept. 16, four days before S&P cited growth concerns and Berlusconi’s “fragile” government as reasons for its downgrade.

IMF Estimate

Italy’s economy expanded an average 0.2 percent annually from 2001 to 2010, compared with 1.1 percent in the euro area. Gross domestic product grew 0.3 percent in the second quarter from the three months through March, when it grew 0.1 percent, national statistics institute Istat said on Sept. 9.

On Sept. 20, the International Monetary Fund cut its growth forecast for Italy, saying it will miss its goal of erasing the deficit. Two days later, the government cut its own forecast, while keeping its commitment for a balanced budget in 2013.

The Finance Ministry said the euro-region’s third-biggest economy will grow 0.7 percent in 2011 instead of the 1.1 percent forecast in April and 0.6 percent in 2012 rather than 1.3 percent. That compares with the growth forecasts by the IMF of 0.6 percent this year and 0.3 percent next.

Deficit Cuts

The ministry also forecast a budget deficit of 3.9 percent of GDP this year, 1.6 percent next year and 0.1 percent in 2013. The IMF projected the deficit to fall to 4 percent of GDP in 2011, 2.4 percent in 2012 and 1.1 percent in 2013.

Berlusconi has pushed through two packages of deficit cuts since mid-July totaling about 100 billion euros. Measures included raising the value-added tax by one percentage point to 21 percent and a levy on incomes of more than 300,000 euros to balance the budget by 2013. The second, announced on Aug. 5, was a condition of ECB support.

The negative outlook on Italy announced last month by S&P means there’s a one-in-three chance that the company will lower the nation’s rating again within the next 12 to 18 months, Moritz Kraemer, S&P’s managing director of European sovereign ratings, said Sept. 20.

Italy will have to find additional savings between 9 billion and 10 billion euros “to increase the chances of reaching a budget that is close to balanced by 2013,” Fabio Fois, European economist at Barclays Capital in London, wrote in a note before the new forecasts were unveiled. “We think that further fiscal measures are likely to be announced over the next couple of weeks.”

--With assistance from Ian Katz in Washington. Editors: Jeffrey Donovan, Dave Liedtka, Kevin Costelloe

To contact the reporter on this story: Lorenzo Totaro in Rome at ltotaro@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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