Frankfurt am Main, December 07, 2016 -- Moody's Investors Service has today changed the outlook on Italy's
Baa2 long-term issuer rating to negative from stable. At
the same time, Moody's has affirmed Italy's long-term
senior unsecured government bond rating at Baa2 and its short-term
commercial paper rating at P-2.
The drivers for today's rating action are:
(i) the slow and halting progress on economic and fiscal reform in Italy,
the prospects for which have diminished further following the 'no'
vote in Sunday's constitutional referendum; and
(ii) the resulting rising risk that the reduction in Italy's large
debt burden will be further postponed given subdued medium-term
growth prospects and recent fiscal slippage, thereby prolonging
the sovereign's exposure to unforeseen shocks.
Concurrently, Moody's has today maintained the local-currency
and foreign-currency bond ceilings at Aa2. The local-currency
and foreign-currency deposit ceilings remain unchanged at Aa2.
The short-term foreign-currency bond and deposit ceilings
remain unchanged at P-1.
A full list of affected ratings is provided towards the end of this press
release.
RATINGS RATIONALE
RATIONALE FOR CHANGING THE OUTLOOK TO NEGATIVE
FIRST DRIVER: DIMINISHED PROSPECTS FOR STRUCTURAL ECONOMIC AND FISCAL
REFORM FOLLOWING THE REJECTION OF CONSITUTIONAL REFORM
The first driver of Moody's decision to change the outlook on Italy's
Baa2 rating to negative relates to the diminished likelihood, following
the 'no' vote in Sunday's constitutional referendum,
that the Italian government will make meaningful further progress on the
structural economic and fiscal reforms needed in order to stabilise the
government's credit profile and improve its capacity to absorb shocks.
Real GDP growth in Italy has, on average, been flat for more
than 15 years, and real productivity has barely increased in 20
years. Both nominal unit labour costs and Italy's real effective
exchange rate show a marked loss of competitiveness. Past and present
administrations have identified a series of reforms to address structural
weaknesses in the Italian economy and in the government's finances.
In Moody's opinion, these reforms should, if implemented
in full, support Italy's credit profile by lifting growth
over the medium term and supporting a reduction of the Italian government's
very high debt burden. In pursuit of these objectives, the
Italian government has in recent years introduced pension reform,
reforms to the judicial system and to the public administration,
as well as labour market reform and a programme of privatisation.
However, reforms implemented to date have had only a limited impact
on Italy's medium-term growth and fiscal outlook.
Many, such as the government's public sector reforms,
have been only partially implemented, and others, such as
pension reform and property tax reform, have been diluted or even
abandoned. As a result, Italy's growth remains subdued
and its growth prospects poor, and longer-term challenges
to the government's fiscal strength persist. If sustained
over time, low growth alongside high indebtedness will contribute
to a gradual erosion in Italy's credit profile, and leave
it increasingly exposed to shocks.
In Moody's view, the popular rejection of constitutional reform
in Sunday's referendum poses a further threat to the achievement
of these reforms, raising the risk of accelerating a weakening of
Italy's credit profile. The contemplated changes were aimed
at streamlining Italy's political processes which might have provided
future Italian governments with the stability and continuity to implement
further reforms. In addition, electoral dissatisfaction,
illustrated by the referendum outcome, although varied in nature
and objective, is likely to constrain further the country's
economic and fiscal reform agenda. It also raises the possibility
of further policy reversals, particularly if the outcome were to
precipitate a general election.
SECOND DRIVER: RISING RISK THAT THE REDUCTION IN ITALY'S ELEVATED
DEBT BURDEN WILL BE FURTHER POSTPONED, PROLONGING THE SOVEREIGN'S
EXPOSURE TO SHOCKS
The second, closely related, driver of the change in Italy's
rating outlook to negative is the rising risk that the stabilisation and
reduction in Italy's large debt burden will be further deferred,
given the likelihood that medium to long-term growth prospects
will remain subdued and recent fiscal slippage.
Italy's subdued growth outlook leaves little scope for any material
reduction in the country's very high debt burden over coming years,
which represents a key credit weakness: Italy's debt-
to-GDP ratio (133% of GDP forecast for 2016) exceeds both
the median of Baa-rated countries as well as its euro area peers.
In fact, Italy's debt ratio is large on a global scale:
in Moody's sovereign rating universe, only Japan and Greece
have higher debt ratios.
The high debt burden leaves the sovereign vulnerable to shocks,
including not just lower-than-expected real GDP growth but
also higher-than-expected fiscal deficits and worsening
debt affordability. By lowering the probability that further meaningful
reform will be undertaken, the outcome of the referendum increases
the risk of a future shock to growth. It also shifts upwards the
risk of a shock to debt affordability, particularly should the outcome
signal, now or in its aftermath, an increase in support for
a change in Italy's relationship with the euro area, and ultimately
for membership of the euro. It may also increase the risk that
contingent liabilities emanating from Italy's very weak banking
sector crystallise on the government's balance sheet, should
the 'no' vote lower the prospects of private capital being
available to recapitalise the weaker parts of the sector.
Over the nearer term, Moody's believes that the prospects
of further fiscal slippage also weigh upon Italy's fiscal outlook.
According to European Commission forecasts, Italy's structural
deficit is expected to deteriorate significantly as compared with both
euro area and wider EU peers between 2015 and 2017. Italy's
headline deficit is expected to be 2.4% of GDP in 2016,
missing by some margin the target of 1.8% set in the 2015
Stability Programme. A combination of tax cuts and spending initiatives
in 2016 have limited progress in reducing the deficit: particularly
the government's reversal of expected hikes in VAT and other taxes,
and its decision to abolish a property tax on first residences.
A key measure in the 2017 draft budget is the EUR7 billion allocated in
additional spending for retirees on the lowest pensions, to be spread
over three years with EUR1.9 billion disbursed in 2017, EUR2.5
billion in 2018, and EUR2.6 billion in 2019. This
measure is a significant reversal of Italy's 2012 pension reform
which introduced new minimum contribution requirements for early retirement.
The 2017 draft budget also earmarks more than EUR6 billion, or 0.4%
of GDP, in additional spending on migrants and to cover reconstruction
costs following several major earthquakes. The European Commission
has flagged concerns that Italy could deviate significantly from its medium
term objective in 2017, stating that the structural deficit will
increase to 1.6% in 2017 from the 1.2% estimated
by the government for 2016, instead of declining, as previously
expected by the government.
As a consequence, Moody's expects that Italy's debt
burden will increase next year. The rating agency now expects Italy's
debt to be slightly over 133% in 2017, and to decline only
very slowly thereafter. The outcome of the referendum suggests
that risks to the deficit and the debt burden remain high.
RATIONALE FOR AFFIRMATION OF THE Baa2 RATING
Moody's decision to affirm Italy's Baa2 rating reflects a
number of continuing credit strengths, including the scale of Italy's
economy and its elevated wealth levels. Italy has the third-largest
economy in the euro area, after Germany and France, the fourth
largest economy in the EU, after Germany, the UK and France,
and its economy is significantly larger than that of Spain. Other
factors underpinning the country's economic resilience are the relatively
low indebtedness of Italy's private sector and the significant diversification
of its economy. The high strength of Italy's institutions,
whilst lower than some of the country's close peers, also
supports the Baa2 rating.
Moreover, notwithstanding the shift in the balance of risk as a
consequence of the 'no' vote, the affirmation reflects
the assumption that the political process will nevertheless lead to a
continuation of the reforms needed to lift growth, and that the
debt burden will stabilise this year at around 133% of GDP and
decline, albeit slowly, thereafter.
WHAT COULD CHANGE THE RATING DOWN / UP
Moody's would consider downgrading Italy's Baa2 issuer rating
if it were to conclude that the country's economic prospects would
remain poor over the medium term, that the stabilisation and reversal
of its debt trajectory would continue to be deferred and remain weak,
and that its ability to absorb shocks would continue to deteriorate.
Proximate causes of a downgrade would include a material decrease in its
primary surplus which the rating agency might conclude was unlikely to
be reversed, a deterioration in the sovereign's funding conditions,
or further shocks to the government's balance sheet, including
the need for a significant recapitalisation of banks by the government.
An emergence of elevated financial and debt market stress and/or a more
turbulent political environment would also be credit negative.
The negative outlook implies that the probability of an upgrade is low.
Moody's would consider stabilising, and ultimately upgrading,
Italy's Baa2 issuer rating if a stronger consensus were to emerge
in favour of the reforms needed to strengthen the economy's growth
prospects. A sustained reversal of the upward trajectory of Italy's
debt-to-GDP ratio against the backdrop of a resumption of
significant growth would also be credit positive.
The referendum on constitutional reform required the publication of this
credit rating action on a date that deviates from the previously scheduled
release date in the sovereign release calendar, published on www.moodys.com.
GDP per capita (PPP basis, US$): 35,781 (2015
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 0.7% (2015 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 0.1%
(2015 Actual)
Gen. Gov. Financial Balance/GDP: -2.6%
(2015 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 1.6% (2015 Actual) (also
known as External Balance)
Level of economic development: High level of economic resilience
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 06 December 2016, a rating committee was called to discuss the
rating of the Italy, Government of. The main points raised
during the discussion were: The issuer's economic fundamentals,
including its economic strength, have not materially changed.
The issuer's fiscal or financial strength, including its debt profile,
has not materially changed. The systemic risk in which the issuer
operates has not materially changed. Other views raised included:
The issuer's institutional strength/framework have decreased.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in December 2015. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
LIST OF AFFECTED RATINGS
Affirmations:
..Issuer: Italy, Government of
.... LT Issuer Rating, Affirmed Baa2
.... Commercial Paper, Affirmed P-2
....Other Short Term (P)P-2
....Senior Unsecured MTN Program, Affirmed
(P)Baa2
....Senior Unsecured Regular Bond/Debenture
, Affirmed Baa2
....Senior Unsec. Shelf , Affirmed
(P)Baa2
Outlook Actions:
..Issuer: Italy, Government of
....Outlook, Changed To Negative From
Stable
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Moody's considers a rated entity or its agent(s) to be participating
when it maintains an overall relationship with Moody's. On
this basis, the rated entity or its agent(s) is considered to be
a participating entity. The rated entity or its agent(s) generally
provides Moody's with information for the purposes of its ratings
process.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Simon Griffin
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
