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Global Credit Research - 27 Feb 2007
Moody's says Prodi's survival probable, but reform remains compromised
London, 27 February 2007 -- The rapid resolution of the political crisis in Italy has removed the
risk of a distracting transitional period following the recent resignation
of and imminent reinstatement vote on Prime Minister Romano Prodi,
says Pierre Cailleteau, Chief Economic and Financial Policy Analyst
at Moody's Investors Service. "However, there is clearly
no solid majority for reform in Italy, and the endorsement by the
nine parties of the coalition of a 12-point pact is more a survival
reflex than a clarified platform," cautions Mr Cailleteau.
According to a forthcoming Moody's study, Italy -- which
faces a serious need to increase productivity in the economy, elevate
labour participation and rein in public spending -- is one of the
EU countries with the lowest level of "reformability".
"While acknowledging the reforms that have taken place in recent
years -- often at some political price -- reform in Italy is
made difficult by an unusual combination of factors," explains
Pierre Cailleteau. "Indeed, the awareness of the problems
is limited overall, ideological fractures are profound and the current
electoral rules notoriously unable to produce working majorities."
While the first two factors are present in a few other countries,
such as France for instance, electoral rules compound the problem.
One indicator monitored by Moody's is the degree of resistance to
change, which ultimately depends on the number of constituencies
that have reasons to maintain the status quo. In Italy, public
spending on pensions and salaries is very high, even by EU standards
-- and health spending, while rather low, is invariably
converging with EU averages. The more numerous the beneficiaries,
the more difficult it is to compress those outlays. In Italy,
those aged 65 years and above represent almost a third of those of working
age (i.e. 20-65) -- one of the highest levels
in the world -- thus limiting spending manoeuvrability.
"Implementing reforms in rich countries does not achieve immediate
positive results as there fewer and fewer low-hanging fruit,
but, likewise, not reforming does not spell disaster,"
adds Mr Cailleteau. "Therefore, a few more years of
political immobility are unlikely to trigger a financial crisis,
but will accentuate the relative economic decline of the country,"
concludes Mr Cailleteau.
London
Pierre Cailleteau
Senior Vice President
Credit Policy Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
London
Frederic Drevon
Managing Director
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
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