Fitch Keeps Negative Outlook on Italy Citing High Debt Level

(Bloomberg) -- Italy’s sovereign credit rating was left unchanged at two notches above junk by Fitch Ratings, which warned an extremely high level of general government debt and the absence of structural fiscal adjustment still pose risks.

The level was confirmed at BBB, while the outlook was maintained at negative.

“GDP growth has stalled as domestic policy uncertainty and weaker external demand has dragged down investment, while private consumption growth has also lost momentum,” Fitch said in its report. “There continues to be a relatively large degree of uncertainty over the fiscal forecast beyond 2019, linked to political dynamics.”

The Fitch decision to keep the rating two steps above non-investment grade will provide some small relief to Italy, which has been seeking to rebound from a recession that started at the end of last year. Italy’s populist government has promised to press ahead with its expansive budget plans to spur growth.

Prime Minister Giuseppe Conte said in a statement that Fitch’s action “confirmed the solidity of our country’s economy, which as expected is feeling the economic slowdown that’s affecting all of continental Europe.”

Italy’s bonds suffered after the administration came to power last June. The country’s borrowing costs kept rising for months before an agreement on the 2019 budget between Conte’s government and the European Commission.

The Commission predicts the Italian economy will grow 0.2 percent this year, the slowest pace in the 19-nation euro area.

Fitch said policy differences between Italy’s coalition partners, the populist Five Star Movement and right-wing League, “and the current absence of a well-defined economic policy agenda,” contribute to investor uncertainty.

Italy has the highest debt-to-output ratio in the euro region after Greece. Italy’s load rose last year to 131.5 percent, according to Bloomberg calculations based on Bank of Italy figures. Fitch sees an increase in general government debt to 132.3 percent of GDP in 2020 from 131.7 percent in 2018.

Fitch forecasts GDP growth of 0.3 percent in 2019, down from 0.8 percent in 2018, with investment growth falling to 0.4 percent from 3.8 percent last year. It expects an increase in the general government deficit to 2.3 percent this year from 1.9 percent of GDP in 2018.

In October, Moody’s Investors Service downgraded Italy to Baa3 or one notch above non-investment grade, while setting the outlook for the nation’s creditworthiness at “stable.” In the same month, S&P Global Ratings made a less drastic move by keeping its BBB grade, two levels above junk, while cutting the outlook to “negative.”

Moody’s is due to review Italy on March 15 and S&P Global Ratings on April 26.

The government will respect an April 10 deadline for the approval of the budget blueprint, including updated forecasts and targets for the economy and public financing, Finance Minister Giovanni Tria told lawmakers in Rome on Wednesday. Tria doesn’t presently see the need for a budget adjustment to reflect the worsening economic outlook.

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