Fitch cuts Italy's debt rating; cites weak growth, political risk


Reuters

UPDATE 2-Fitch cuts Italy's debt rating; cites weak growth, political risk


* Fitch cuts Italy's sovereign rating to 'BBB' from 'BBB+'
    * Move could increase market pressure on Italy's debt
    * Fitch says government is weak, political risk rising
    * Cites high debt, bank woes, backloading fiscal
consolidation

 (Adds comment, background, bullet points)
    By Gavin JonesROME, April 21 (Reuters) - Ratings agency Fitch downgraded
Italy's sovereign debt on Friday, citing the country's sluggish
economic growth, fiscal slippage, weak government, banking
problems and political risk ahead of elections due in 2018.
    Fitch cut Italy's sovereign credit rating to 'BBB' from
'BBB+', a move that could put further pressure on its borrowing
costs which have already been rising in recent months. The
outlook for the rating is now stable, it said.
    The agency had put the euro zone's third largest economy on
watch in October with a negative outlook ahead of a referendum
on constitutional reforms intended to streamline lawmaking which
was lost by former Prime Minister Matteo Renzi.
    Renzi then resigned to make way for what Fitch described as
"a weakened interim government," led by his former foreign
minister Paolo Gentiloni.
    "Italy's persistent track record of fiscal slippage,
backloading of consolidation, weak economic growth and resulting
failure to bring down the very high level of general government
debt has left it more exposed to potential adverse shocks,"
Fitch said.
    "This is compounded by an increase in political risk and
ongoing weakness in the banking sector, which has required
planned public intervention in three banks since December," it
added.
    Italy's public debt hit a record last year at almost 133
percent of gross domestic product (GDP) - the highest ratio in
the 19-nation euro zone after Greece.
    Italy, which has the most sluggish growth in the euro zone
and an unstable political outlook, has repeatedly backslid on
promised deficit cuts. The result is that markets have become
increasingly leery of its government bonds.
    The spread between Italian benchmark bond yields and their
safer German equivalent has widened to more than two percentage
points from one percentage point a year ago, and that rise would
have been far steeper without the support of the European
Central Bank.
    Fitch noted that Italy's debt last year totalled 11.2
percent of GDP higher than the target Rome had set in 2013.

    BANK WOES
    The ratings agency forecast Italy's economy will grow by 0.9
percent in 2017, the same pace as last year, and by 1.0 percent
in 2018, which would still leave inflation-adjusted GDP more
than 5 percent below the 2007 level.
    In January, Canadian ratings agency DBRS cut Italy's
sovereign rating, citing the same problems highlighted by Fitch.
Moody's Investors Service also has the country on a negative
outlook, meaning a downgrade could be in the pipeline.
    Fitch said its outlook for Italy's banking sector was
negative, reflecting the high level of non-performing loans and
weak profitability.
    Three banks - Monte dei Paschi di Siena, Banca Popolare di
Vicenza and Veneto Banca - are seeking public intervention to
keep them in business. The Italian banking sector as a whole is
weighed down by some 203 billion euros ($217.68 billion) of bad
loans.
    The agency said that ahead of next year's election, the
"risks of weak or unstable government have increased, as has the
possibility of populist and eurosceptic parties influencing
policy."
    Recent opinion polls have given a clear and growing lead to
the anti-establishment 5-Star Movement, which wants to hold a
referendum on Italy's continued membership of the euro zone.
 ($1 = 0.9326 euro)

 (Editing by G Crosse)
 ((gavin.jones@thomsonreuters.com; +39-06-8522-4232))

Keywords: ITALY RATING/FITCH (UPDATE 2)



This article appears in: Fundamental Analysis , Stocks , World Markets , 401k , Retirement , Bonds


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