The Daily Update - Blinkered Italians?

On Friday the ratings agency Fitch cut Italy's sovereign debt outlook to negative, whilst reaffirming the Mediterranean country’s rating at BBB, stating expectations that the new coalition government's fiscal loosening may leave the country's high levels of debt more exposed to potential shocks. Italy’s new populist government, made up of the far-right League and anti-establishment 5-Star Movement, was of a ‘new and untested nature' and contributed to the decision according to Fitch. The new government has promised to follow through on its electoral pledges with plans to increase public spending with a minimum wage for the poor plus tax cuts. Fitch worries these promises could have a negative impact on the country's deficit and debt. Last week Moody’s extended to the end of October a decision on whether to cut Italy's debt ratings. At the moment Moody’s rates Italy at Baa2.

Italy has approximately EUR2.3tln of debt, making it one of the world’s most indebted nations, which equates to 130 percent of its domestic output. However, at the moment the two coalition partners have not given any signal to which, if any, of their election promises they are willing to water down in order to keep the public purse under control. At the end of September the government is due to unveil its public finance targets and growth plans, with the budget being approved by the cabinet approximately a month later. Giovanni Tria, Italy’s Economy Minister believes that once the plans are announced, the rating agencies will revise their forecasts. Tria told journalists ‘The actions of the next few weeks will be translated into official government documents’ adding ‘The Fitch judgments will be corrected, positively, since they are opinions not based on facts, but on intentions attributed to the government’

More worryingly though, were the views of Luigi Di Maio, the Deputy Prime Minister, who believes the Italian government face a stark choice between putting Italy’s population first or listening to the rating agencies. ‘The two things aren’t necessarily opposed to each other, but if that is the case, we will always choose the Italians’ he said, adding ‘We can’t think of reassuring a rating agency and the markets, and stabbing Italians in the back’. With Italy’s credit rating just two notches above junk, at some point in the not too distant future Maio might be rethinking that statement.

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