Italy Dodges Downgrade With Credit Rating Affirmed by S&P

(Bloomberg) -- Italy’s credit grade was left unchanged by S&P Global Ratings, which said the nation’s diversified and wealthy economy, net external creditor position and low levels of private debt partly offset the drag from high public leverage.

The BBB rating is still just two notches above junk, and S&P kept its negative outlook, which means the risk of a downgrade remains. The country’s financial position has been severely weakened by the cost of dealing with the coronavirus.

The U.K., another European country hit hard by the pandemic, also had its long-term foreign currency debt rating affirmed by S&P at AA. Output is shrinking at the fastest pace in decades, with a quarter of the labor market already effectively out of work, according to the latest official reports and data.

Italy was already encumbered with a huge debt load, a situation made far worse because of the virus and the shutdown to contain the disease. The country’s rating could be lowered if the ratio between government debt and gross domestic product “fails to shift onto a clearly discernible downward path over the next three years, or if there is a marked deterioration in borrowing conditions that jeopardizes the sovereign’s public finance sustainability,” S&P said.

The euro held close to its highs for the day following the announcement and was up around 0.4% versus the dollar. The pound also maintained its gains for the day.

Italian Prime Minister Giuseppe Conte’s government is spending billions of euros on health care and helping companies and workers. With the economy facing a deep recession, the deficit could reach more 6.3% of economic output this year, pushing the debt ratio to 153%, S&P said.

The European Central Bank this week took steps to shield countries like Italy from the consequences of being downgraded to junk. It loosened rules and will accept collateral from banks for loans based on ratings as of April 7. The central bank will apply a haircut to any assets rated below its minimum standards, but the move will help banks access crucial liquidity.

“The ECB’s current financing backstop enables Italy to refinance its debt at real interest rates of around 0%,” S&P said. “In nominal terms, and absent a significant deterioration in borrowing costs, Italy will pay less to service its total debt stock this year and into 2021-2023, than it paid in 2019.”

Italy’s government expects the economy to shrink by 8%, while Bloomberg Economics is forecasting that the slump in GDP will be 13% this year. S&P projects a contraction of just under 10% this year and a recovery of 6.4% in 2021, though it sees the size of Italy’s economy probably remaining below 2019’s until early 2023.

Unemployment is forecast to rise to 11.2% this year versus less than 10% on average during 2019, with the rigidity of the labor market, particularly in manufacturing, possibly playing a stabilizing role.

Conte pledged new economic stimulus worth at least 50 billion euros on Tuesday in addition to the 25 billion-euro package approved last month.

S&P said Italy’s outlook could be shifted to stable if the country’s economy performs better than it expects, leading to a stronger-than-anticipated fiscal situation. It could also revise the outlook to stable if Italy’s banking system weathers the pandemic shock without a material increase in nonperforming loans or a depletion of its capital base.

Elsewhere in the euro area, S&P shifted the outlook on Greece’s rating to stable from positive as it affirmed its credit score at BB-, three steps below investment grade. Credit assessor Fitch Ratings, meanwhile, affirmed its score on the Netherlands at AAA.

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