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S&P reaffirms BBB rating on Italian sovereign debt, but lowers outlook to 'negative'

By Alexander Bueso

Date: Saturday 27 Oct 2018

S&P reaffirms BBB rating on Italian sovereign debt, but lowers outlook to 'negative'

(Sharecast News) - Italy dodged a downgrade of its sovereign debt for the second time in less than a week on Friday, but got an earful from analysts at Standard&Poor's, who nevertheless did lower their outlook on the country's rating.
Analysts at S&P reiterated their BBB credit rating on the Italy's long-term sovereign debt, but said the government's policies risked 'crowding out' or stifling private investment in the economy and that its debt load as a proportion of gross domestic product was now projected to remain flat over the next three years at 128.5% of GDP, instead of falling.

To a degree, the former ran counter to some of the arguments put forth by the government in Rome to defend their medium-term budget plans, while according to S&P the latter had eroded investor confidence, as seen in rising yields on Italian government debt.

S&P also estimated that Italy's public deficit will hit 2.7% of GDP in 2019, above the 2.4% targeted in the draft budget plans submitted to the European Commission by Rome.

It was that risk of the public sector crowding-out private companies that led S&P to lower its outlook on the country's debt from 'stable' to 'negative', meaning that a downgrade over the next 24 months was possible.

To take note of as well, higher yields on Italian debt were also negatively impacting on Italian lenders' - the largest group of creditors to the Italian state - access to capital funding and, to a lesser extent, on their regulatory capital ratios.

In terms of the risks moving forwards, S&P said a downgrade might materialise if, real GDP growth "materially" undershot its expectations, if the public sector spending deficit and net government debt as a proportion of GDP "significantly" exceeded its forecasts or in case of a "marked deterioration" in the economy's external financing conditions.

To take note of, one week before another ratings agency, Moody's had cut its rating on Italian sovereign debt by one notch to Baa3, to just one step above so-called 'junk', although it revised its outlook on the rating from 'negative' to 'stable', helping to assuage concerns that a downgrade to sub-investment grade status might be just around the corner, which might have seen money flows out of Italian debt accelerate substantially.

On Friday, the yield on the 10-year Italian sovereign bond fell by five basis points to 3.45%.



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