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Announcement:

Moody's: Review for downgrade of Italy's Baa2 rating extended to gain greater clarity on fiscal path and reform agenda

20 Aug 2018

London, 20 August 2018 -- Moody's is extending the review for downgrade on Italy's Baa2 ratings that it initiated on 25 May so as to get better visibility on the country's policy direction. The rating agency usually aims to conclude rating reviews within a time frame of three months. However, in this case, Moody's is extending the time frame pending greater clarity on the country's fiscal path and reform agenda. It will most likely conclude the review by the end of October at the latest.

The key drivers for the review for downgrade were (1) the significant risk of a material weakening of Italy's fiscal strength, given the fiscal plans of the new government that took office in early June; and (2) the risk that structural reform efforts may stall, or that important past reforms such as the 2011 pension, or the 2015 labour market reforms, could be reversed.

--UPDATE TO MEDIUM-TERM FISCAL PLANS AND 2019 BUDGET SHOULD BRING MORE CLARITY OVER FISCAL STANCE--

Moody's awaits the publication of the update to the annual Economic and Financial Document (DEF), which sets out the government's economic forecasts and policy plans for the next three years. According to the Ministry of Finance it will be submitted to parliament no later than 27 September. The government will also have to present the broad outlines of its draft budget plan for 2019 to the European Commission by 15 October, with the budget itself needing to be approved in the Italian parliament by the end of the year.

So far, Italy's finance minister has indicated that the government plans to implement its key fiscal pledges, in particular the Lega's "flat tax" proposal and the Five Star' Movement's "citizen income," but in a gradual manner so as to achieve a gradual reduction in the government's very high debt burden. However, the two political leaders have also stressed the overarching importance of implementing their key pledges, creating a significant level of uncertainty.

The update to the DEF and the draft budget should provide clarity on the government's economic policies, its fiscal plans and how it intends to finance its policy pledges. The government will also have to find additional revenue sources of around €12.5 billion, or 0.7% of GDP, to compensate for its decision to repeal the pre-legislated VAT rate hike due to be introduced in January 2019. Moody's also expects to gain more clarity over the coalition's plans regarding the pension system.

The additional time for concluding the review will also allow us to assess any government plans to advance on other structural reforms, which would aim to improve the country's growth prospects over the medium and long term.

--INITIAL LABOUR MARKET MEASURES REDUCE FLEXIBILITY BUT DO NOT SIGNAL WHOLESALE REFORM REVERSAL--

On 7 August, the Italian parliament approved the government's so-called "Dignity Decree", a set of measures aimed at reducing the number of temporary employment contracts, which have increased at a much more rapid pace than permanent jobs in recent years. The key provisions of the law are a reduction in both the maximum length of temporary contracts (from 36 months to 24 months) and in the number of extensions (from five to four within the 24 months' window), as well as an increase in social security contributions of 0.5% for each renewal. While these changes reduce the relative attractiveness of temporary contracts, the law also raises the cost to employers for unfair dismissal, thereby reducing the incentives to hire employees on permanent contracts.

The law also re-introduces the need to justify the renewal of a temporary contract, which had been abolished under the 2015 Jobs Act. For workers hired after March 2015, the minimum indemnity for unfair dismissal increases from four to six months' salary while the maximum indemnity is increased from 24 to 36 months' salary.

Viewed in isolation, the law is a moderate change rather than a fundamental reversal of earlier labour market reforms. But in Moody's view, the measures reduce flexibility and are unlikely to lead to a material increase in permanent employment contracts. It remains to be seen whether more changes are to come, or whether the "Dignity Decree" is the full extent of this government's labour market reforms.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Kathrin Muehlbronner
Senior Vice President
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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