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.
RATINGS RATIONALE
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.
WHAT COULD MOVE THE RATING UP/DOWN
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.
COUNTRY CEILINGS
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 www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant 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 relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant 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.
The ratings of rated entity Italy, government of were initiated
by Moody's and were not requested by this rated entity.
Rated entity Italy, government of or its agent(s) participated in
the rating process. This rated entity or its agent(s), if
any, provided Moody's access to the books, records and
other relevant internal documents of the rated entity.
The ratings have been disclosed to the rated entities or their designated
agent(s) and issued with no amendment resulting from that disclosure.
Information sources used to prepare each of the ratings are the following:
parties involved in the ratings, parties not involved in the ratings,
and public information.
Moody's considers the quality of information available on the rated
entities, obligations or credits satisfactory for the purposes of
issuing these ratings.
Moody's adopts all necessary measures so that the information it
uses in assigning the ratings is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entities or their related third parties within
the two years preceding the credit rating action. Please see the
special report "Ancillary or other permissible services provided
to entities rated by MIS's EU credit rating agencies" on the
ratings disclosure page on our website www.moodys.com for
further information.
Please see the ratings disclosure page on www.moodys.com
for general disclosure on potential conflicts of interests.
Please see the ratings disclosure page on www.moodys.com
for information on (A) MCO's major shareholders (above 5%) and
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between directors of MCO and rated entities as well as (C) the names of
entities that hold ratings from MIS that have also publicly reported to
the SEC an ownership interest in MCO of more than 5%. A
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of the board of directors of a shareholder of Moody's Corporation;
however, Moody's has not independently verified this matter.
Please see Moody's Rating Symbols and Definitions on the Rating Process
page on www.moodys.com for further information on the meaning
of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time
before Moody's ratings were fully digitized and accurate data may not
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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.
Dietmar Hornung
VP - Senior Credit Officer
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
Bart Oosterveld
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
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
Moody's downgrades Italy's government bond rating to Baa2 from A3, maintains negative outlook
