Prime-1 ratings affirmed
Frankfurt am Main, October 04, 2011 -- Moody's Investors Service has today downgraded Italy's government bond
ratings to A2 with a negative outlook from Aa2, while affirming
its short-term ratings at Prime-1. The rating action
concludes the review for downgrade initiated by Moody's on 17 June,
2011.
The main drivers that prompted the rating downgrade are:
(1) The material increase in long-term funding risks for euro area
sovereigns with high levels of public debt, such as Italy,
as a result of the sustained and non-cyclical erosion of confidence
in the wholesale finance environment for euro sovereigns, due to
the current sovereign debt crisis.
(2) The increased downside risks to economic growth due to macroeconomic
structural weaknesses and a weakening global outlook.
(3) The implementation risks and time needed to achieve the government's
fiscal consolidation targets to reverse the adverse trend observed in
the public debt, due to economic and political uncertainties.
The downgrade reflects the weight of these growing risks relative to some
positive credit attributes. These include a lack of significant
imbalances in the economy or severe pressure on private financial and
non-financial sector balance sheets, as well as the actions
undertaken by the government over the summer. Moody's notes
that the size of the rating action is largely driven by the sustained
increase in the country's susceptibility to financial shocks due
to a structural shift in market sentiment regarding euro-area countries
with high debt burdens. A country's susceptibility to shocks
is a key factor under Moody's sovereign methodology.
The negative outlook reflects ongoing economic and financial risks in
Italy and in the euro area. The uncertain market environment and
the risk of further deterioration in investor sentiment could constrain
the country's access to the public debt markets. If such
risks were to materialise and the long-term availability of external
sources of liquidity support were to remain uncertain, the country's
rating could transition to substantially lower rating levels.
RATIONALE FOR DOWNGRADE
The downgrade stems from three closely related drivers:
1) 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. The country is a frequent issuer with
refinancing needs of more than EUR200 billion in 2012. Although
future policy actions within the euro area could reduce investors'
concerns and stabilise funding markets, the opposite is also increasingly
possible. Even if policy actions were to succeed in the short term
in returning some degree of normality to euro area sovereign debt markets,
the underlying fragility and loss of confidence is deep and likely to
be sustained. As indicated by the A2 rating, the risk of
default by Italy remains remote. Nonetheless, Moody's
believes that the structural shift in sentiment in the euro area funding
market implies increased vulnerability of this country to loss of market
access at affordable rates that is incompatible with a 'Aa'
rating. Moreover, the preponderance of downside risks and
the potential for rapid rating transition which those risks imply are
not compatible with a rating at the top end of the 'A' range.
The repositioning of Italy's government bond rating to A2 reflects
Moody's judgment of the balance of long-term risks facing
the Italian sovereign. It is consistent with Moody's broader
reassessment of sovereign risk in the euro area, focusing on member
countries that are more susceptible to confidence-related shocks
due to high public debt exposure and/or large fiscal imbalances.
2) The Italian economy continues to face significant challenges due to
structural economic weaknesses. These problems -- mainly low
productivity and important labour and product market rigidities --
have been an impediment to the achievement of higher potential growth
rates over the past decade and continue to hinder the economy's
recovery from the severe recession it experienced in 2009. These
structural impediments to economic growth cannot be removed quickly.
The government's reform plans have only just started to address
some of these structural challenges, and they need to be implemented
efficiently. Moreover, moderate medium-term growth
prospects for the Italian economy have been further revised downwards
due to potential adverse effects of a weakening European and global growth
outlook. Economic growth will be a crucial factor determining the
government's revenues, the achievement of fiscal consolidation
targets and, ultimately, its debt trajectory.
3) Finally, there is increasing uncertainty for the government to
achieve fiscal consolidation targets. Since more than half of the
consolidation measures are based on government revenue growth, the
plans are vulnerable to the high level of uncertainty around economic
growth in Italy and elsewhere in the EU. Moreover, political
consensus on additional expenditure cuts can be difficult to achieve.
As a consequence, the government may find it challenging to generate
the primary surpluses that are needed to place the public debt-to-GDP
ratio and the interest burden on a solid downward trend. Moody's
expects Italy's public debt-to-GDP ratio to reach
120% at the end of this year, up from 104% at the
start of the global crisis. As well as posing a risk to Italy's
financial strength, which is a key consideration under Moody's
sovereign methodology, failure to achieve fiscal and debt targets
could increase the country's susceptibility to financial market
shocks.
PRINCIPAL METHODOLOGY
The principal methodology used in this rating was Sovereign Bond Ratings
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.
This rating was initiated by Moody's and was not requested by the rated
entity.
This rated entity or its agent(s) participated in the rating process.
The rated entity or its agent(s) provided Moody's access to the
books, records and other relevant internal documents of the rated
entity.
The rating has been disclosed to the rated entity or its designated agent(s)
and issued with no amendment resulting from that disclosure.
Information sources used to prepare the rating 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
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the lead rating analyst and to the Moody's legal entity that has issued
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Alexander Kockerbeck
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 ratings to A2 with a negative outlook
