* Moody’s cuts Italy by two notches to Baa2
* Warns could cut further if access to markets dries up
* Blow to borrowing costs ahead of debt sale later Friday
* German govt adviser says Italy borrowing costs unjustified
By Valentina Za
MILAN, July 13 (Reuters) – Moody’s surprised markets on
Friday by downgrading Italy’s government bond rating by two
notches to Baa2 and warned it could cut it further, piling on
pressure just hours before the euro zone third-largest economy
launches its latest bond sale.
The ratings agency blamed increased liquidity risks for the
country amid persistent euro zone woes and an expected
deterioration of Italy’s already weak economic condition as the
main reasons behind its decision.
The downgrade of Italy to just two notches above junk status
could raise already-painful borrowing costs for the country and
risks undermining Prime Minister Mario Monti’s efforts to turn
market sentiment through tough fiscal and structural reforms.
The stark warning from Moody’s, which comes as investors are
already fretting about Spain’s ability to mend its banking
sector, knocked the euro down about a quarter of a cent
and sunk BTP futures 60 ticks 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,” the agency warned.
“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.”
Moody’s took its ratings for Italy below those from agencies
Standard & Poor’s Ratings Services and Fitch Ratings, a move
that risks triggering further investment outflows from Italy.
In an interview published on Thursday, Peter Bofinger, an
economic adviser to German Chancellor Angela Merkel, praised
Monti’s reform efforts and said Italy’s borrowing costs of
6.0-6.5 percent were ‘unreasonably high’ in view of its
structural balance and low deficit.
“It takes time to lower the debt. The key thing now is the
deficit,” Bofinger said.
BAD TIMING
The timing could not be worse for Italy as it seeks to sell
5.25 billion euros ($6.40 billion) in medium-term bonds later on
Friday, including a new three-year issue.
There had been hopes borrowing costs would fall at the
auction after signs of progress on a Spanish bank bailout and a
sharp improvement in Italy’s borrowing costs at a one-year bond
auction on Thursday.
“Italian bonds were already giving up ground and the Moody’s
news is going to chew them a bit further,” said a bond trader.
Moody’s said the downgrade was driven by Italy’s increased
susceptibility to political event risk, such as a Greek exit
from the euro zone or Spain requiring further aid.
The agency said the country faced growing funding problems
given its 2 trillion euro public debt and significant annual
borrowing needs of 415 billion euros in 2012-2013, as well as
its diminished overseas investor base.
On the other hand, 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, Moody’s said
Analysts estimate that foreigners hold about one third of
Italy’s public debt, down from around 40 percent a year ago.
Data from Italy’s banking association ABI on Thursday also
showed that foreign deposits at Italian banks were down 20
percent year on year, confirming a trend of shrinking
cross-border financing in the euro zone.
High sovereign borrowing costs are ‘unsustainable’ for
Italian banks as they put massive strain on the cost of bank
funding, Federico Ghizzoni, who heads Italy’s largest bank by
assets UniCredit said on Thursday.
Italian politicians and executives have criticised past
rating action by the three top international agencies, saying
the downgrades hit the country by forcing up borrowing costs.
Italian magistrates are currently investigating the
downgrade action by the three rating agencies, which deny
vigorously any wrongdoing.
