Italy’s Rising Reputation With Investors May Get Ratings Boost

(Bloomberg) -- S&P Global Ratings is set to issue its first major statement on Italy’s finances since the country’s fledgling coalition government took power, in what could provide a further boon to its sovereign debt.

Italian bonds are the best performers in the euro area this year, with a 13% return according to Bloomberg Barclays indexes. Friday’s review follows an oversubscribed sale of inflation-linked bonds this week, after which Davide Iacovoni, the head of the country’s debt agency, said a more conciliatory stance toward the European Union on budget issues should reduce the country’s risk premiums further.

There are hopes that S&P could raise its outlook on the country to positive, even though Italy has the second-biggest debt burden in the euro area. The optimism comes in stark contrast to last year’s review and its existing “negative” label.

“The more stable political outlook and much lower funding rates compared to a year ago will convince the S&P on Friday to remove the negative outlook and move it back to neutral or even positive,” wrote Arne Lohmann Rasmussen, head of fixed-income research at Danske Bank A/S.

Last October, S&P held Italy’s rating at BBB, two levels above junk as it cut its outlook on the nation’s creditworthiness. In the same month, Moody’s Investors Service reduced its rating on Italy to Baa3, one level above non-investment grade.

The new government of the Five Star Movement and the Democratic Party was formed in September after previous coalition member, the League Party, was outmaneuvered after failing in an attempt to force fresh elections. While Italy received a request by the European Commission to clarify its 2020 budget plans, submitted to Brussels earlier in October, Italian Finance Minister Roberto Gualtieri underlined the government’s commitment to fiscal consolidation and structural reform.

Iacovoni, who leads the management of Italy’s 2.5 trillion euros ($2.8 trillion) of debt, pointed to a “strong recovery” in foreign investors’ holdings of its bonds, and drew a contrast with last year. Speaking at a Bloomberg conference in Milan, he said Italy “is no longer under the radar of international investors as a potential source of risk.”

The success of this week’s sale added to speculation that the more stable-looking composition of the government and its revised fiscal plans have lifted confidence in the country’s debt, as it seeks to widen its investor base. Retail investors flocked back to BTP-Italia bonds -- placing almost 3 billion euros in orders -- having been notably absent from the previous sale in November. Institutional investors also moved back in for the debt, with demand outstripping supply. Last week, Italy sold dollar-denominated bonds, which were also well-received.

Demand for Italian government bonds is likely to have been supported by the European Central Bank’s return to economic stimulus. The positive returns they offer also stand out for investors faced with negative yields on $13 trillion dollar’s worth of debt worldwide, which lock in a loss if held to maturity.

The yield on 10-year bonds was one basis point higher at 0.92% on Friday, having touched a record low of 0.75% in September, while its spread over Germany’s equivalent debt was one basis point narrower at 130 basis points, reflecting the premium demanded by investors for the higher levels of risk involved in holding Italian debt over the relative safety of bunds.

Positive comments from ratings agencies could add to the optimistic assessment of Italian debt and help shrink its yield spread over German debt. Danske’s Rasmussen expects the gap to narrow to 120 basis points if Italy’s market reputation continues to improve.

To contact the reporter on this story: James Hirai in London at jhirai3@bloomberg.net

To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net, Michael Hunter

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