Fitch Ratings this morning cut its rating on Italian debt one notch from ‘A-’ to ‘BBB+’ with a negative outlook. And the ratings firm gave a long list of reasons for the cut.
The recent indecisive Italian parliamentary elections lead the list, followed by increased risk that the country’s ongoing recession can be turned around. Fitch expects Italy’s GDP to contract by 1.8% in 2013, better than the 2.7% contraction in 2012, but evidence that the recession in the country is “one of the deepest in Europe.” Italian debt is expected to rise to near 130% of GDP this year, worse than the 125% level Fitch forecast last summer.
And about that government:
The inconclusive results of the Italian parliamentary elections on 24-25 February make it unlikely that a stable new government can be formed in the next few weeks. The increased political uncertainty and non-conducive backdrop for further structural reform measures constitute a further adverse shock to the real economy amidst the deep recession. … A weak government could be slower and less able to respond to domestic or external economic shocks.
It’s no secret that defeated prime minister Mario Monti was a favorite of the eurozone crowd because he was, after all, a technocrat just like they are. His electoral loss throws into question whether or not the country’s new leaders will want or be able to impose further austerity. Fitch has not yet placed its bet on how that will work out, but it is pretty clearly expecting the structural corrections (austerity) that it hopes for not to materialize under whatever new government is finally formed.
The Fitch Ratings press release is available here.