The Rearview Mirror. November 2018: Italy is battling with EU

Blog of markets and finance edited by Christian Zorico

November 2018: Italy is battling with EU

Moody’s on Friday the 19th cut Italy’s sovereign debt rating to one notch above junk status. The rationale behind this downgrade stays in some concerns over government budget plans. However, the final decision came out by maintaining the outlook stable, providing the Country some more time to adjust its trajectory. In fact, a negative outlook would have been a clear signal of a possible further downgrade to the Sub-Investment space.

Just a week later, on Friday the 26th, Standard & Poor’s left Italy’s sovereign debt rating unchanged. In this case, the rating agency gave itself more time to downgrade the Italian debt by “simply” lowering its outlook to negative from stable.  Also in this case some concerns about the debt sustainability have arisen. “The Italian government’s economic and fiscal policy settings are weighing on the country’s economic growth prospects, a critical driver of government debt-to-GDP trajectory”, S&P said.

Meanwhile the Italian financial spread seems to have incorporated the bad news coming from the rating agency, even if the crucial point remains the long run. The market is discounting the current situation but investors will remain aware about the progress of anti-European establishment debate. Even for an Italian elector is difficult to understand where this government would like to go. It seems they are all in a never-ending electoral campaign. For instance, Prime Minister Giuseppe Conte tried to send reassuring signals by telling Bloomberg TV that his government has no “Plan B. Almost at the same time Luigi Di Maio looks at Draghi as the person who had been “poisoning the atmosphere” with his call on Italy to tone down its fight with Brussels. Mr Matteo Salvini, on the other hand showed off his muscles by saying ‘We are not changing a comma of the budget’.

All in all, no-one  is coping with two main problem of the Italian situation: high debt and low competitiveness. Surely the government’s plan to lower the retirement age, if fully implemented, will erase the benefit from previous Fornero Reform. To use some words from Standard and Poors, it will “threaten the long-term sustainability of public finances.” The fiscal budget is setting aside negligible resources to the productive investments and lagging for the strengthening of the scholar system or modernisation of the productive system.

S&P also highlighted that Italycontinues to be supported by its wealthy and diversified economy and its strong external position, with the economy close to becoming a net creditor in the context of its net international investment position.” Having said that, may be Italy should not consider the European system as the enemy, but a strategy to adopt in order to implement responsible and forward looking objectives. The legitimate choice (because the government parties have been democratically elected) of increasing the Italian Debt to sustain some non-productive expenses or financing for an earlier retirement is deteriorating the sustainability of the entire financial mechanism. An apparently populist choice, would reveal its bill in the future, a certain expense that the poorest part of the population will pay for it.

 Christian Zorico: LinkedIn Profile

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