Moody's downgrades Italy credit rating on debt and deficit concerns

Oct 22, 2018, 00:25
Moody's downgrades Italy credit rating on debt and deficit concerns

Euro commissioner Pierre Moscovici was in Rome on Thursday to hand a letter raising concerns over the draft budget to Italian finance minister Giovanni Tria. The two have argued that Italy needs the extra spending to help boost economic growth.

While Italy's deficit is well within the 3 percent limit laid out in treaties, the commission has demanded smaller gaps for Italy to bring down its debt load, the largest in Europe in absolute terms and second only to Greece's as a percentage of the economy.

The letter stated that Italy's budget proposal, which was initially announced in September was in contravention of the EU's budget regulations.

Italy's planned government spending growth of 2.7% is about 2.6% higher than the maximum allowed under European Union rules, which cap this at 0.1%, and allows the European Union executive to accuse Italy of non-compliance with the budgetary policy obligations, even as it tried to continue constructive dialogue with Italy to reach a final assessment.

The standoff has flared up today, with several EU leaders openly criticising the Italian government over its austerity-busting budget, which contravenes European Commission rules imposed on deficits.

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Italy's Prime Minister defended its free-spending budget on Thursday, brushing off criticism from Brussels as the European Commission stepped up pressure over a draft it labelled an unprecedented breach of EU fiscal rules.

Italy's deficit is now projected at 2.4 percent of GDP, far higher than the 0.8 percent estimate given by the earlier centre-right government.

It includes a series of pension and tax changes that will cost 37 billion euros ($43 billion), of which 22 billion will be paid for by expanding the deficit.

"We are writing to consult you on the reasons why Italy plans an obvious significant deviation of the recommendations adopted by the Council under the Stability and Growth Pact", the two men said in the letter.

Analysts say Rome is in a good bargaining position, given the Eurozone's ongoing difficulties with Brexit.

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The stable rating outlook from Moody's reflects the broadly balanced risks at the Baa3 rating level, the company said, noting that Italy still exhibits important credit strengths that balance its weakening fiscal prospects.

"Italy is headed for a showdown with Brussels and I am not sure they have much to lose", Manulife equities head David Hussey told AFP.

The European Commission is now expecting a more in-depth review of the Italian budget for next year, with officials saying Rome must make a solid case for its rising fiscal deficits.

"The 2.4% figure is a ceiling for all the various measures included in the budget, but it's not a given that all of them can be implemented because there could be technical difficulties", Giorgetti said.

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