Italy May Be Cut by Moody's on Concerns Over New Government

(Bloomberg) -- Italy’s rating may be cut by Moody’s over concerns about the new government’s fiscal plans and the risk that some important past measures, such as pension reform, might be reversed.

While "some of the coalition parties’ original proposals have been modified in the final coalition agreement, they would still lead to a weaker, not a stronger, fiscal position going forward," the agency said in a statement Friday. "So far, Moody’s has assumed a gradual deficit reduction over the coming years, which in turn would allow for a very gradual decline in the public debt ratio."

Italy’s public debt stood at 2.3 trillion euros at the end of March, according to the nation’s central bank. With the second-biggest public-debt ratio in the euro zone, pledges by the new government of increased spending have unsettled financial markets. The Italy-Germany 10-year yield spread reached the widest since 2014 earlier Friday.

"Far from offering the prospect of further fiscal consolidation, the ’contract’ for government signed by the two parties includes potentially costly tax and spending measures, without any clear proposals on how to fund those," Moody’s said.

Italy is currently rated Baa2 by the agency, the second-lowest investment-grade rating.

The Five Star Movement and League party have published a coalition government plan that includes reviewing fiscal policy, bail-in rules and Basel banking accords. Italy Premier-Designate Giuseppe Conte said Thursday that protecting savers hit by bank failures is a priority and "those who have suffered fraud or have been deceived will be refunded." Analysts and investors worry that the measures could slow the reduction of bad debt and hit banks’ valuations.

©2018 Bloomberg L.P.