Italy is unlikely to face a credit rating cut after Moody’s Investor Service downgraded Ireland by one level, analysts said.
"An Italian downgrade is not an imminent threat, not even in the medium term," Ioannis Sokos, an interest-rate strategist at BNP Paribas SA in London said. "Italy is under stable outlooks by all agencies, and there has been not even a slight warning with respect to any sort of downgrade risk."
Ireland had its credit rating cut to Aa2 from Aa1 by Moody’s, which cited a "significant loss of financial strength" and the cost of bank bailouts. Moody’s has kept its rating of Italy unchanged at Aa2 since May 2002. Standard & Poor’s has been more willing to cut, slashing its rating twice in that period -- in July 2004 to AA- and again in October 2006 to A+.
On April 8, Standard & Poor’s reiterated its "stable" outlook, saying Italy’s plan to cut spending and its deficit next year may be a "supporting factor" for the ratings. On May 7 Moody’s said that Italy is not among the countries most at risk from Europe’s spreading debt crisis and its credit outlook for 2010 remained stable.
Some analysts say that given the difference between S&P and Moody’s ratings on Italy, Moody’s "stable" outlook may not last.
The yield premium, or spread, that investors charge to hold Italian 10-year bonds over comparable German bunds, the European benchmark, narrowed by six basis points to 141 basis points today. The spread between Irish and German bonds widened eight basis points to 291 basis points.
On May 26, Prime Minister Silvio Berlusconi’s government passed 24.9 billion euros ($32.3 billion U.S.) of budget cuts over the next two years as part of a European effort to convince investors the region can control budget deficits after Greece’s near default.
The package aims to reduce Italy’s budget gap an additional 1.6% of gross domestic product to bring the shortfall within the E.U. limit of 3% of GDP in 2012 from 5.3% last year. Ireland had the biggest deficit in the euro region last year at 14.3% of economic output.
Moody’s last week cut Portugal’s rating by two levels, citing prospects for weak economic growth and rising debt.
On July 15 the Bank of Italy raised its 2010 growth forecast for Europe’s fourth-biggest economy to 1% from a previous estimate of 0.7%, saying export gains will drive the recovery as rising unemployment weighs on domestic demand. The $2.1-trillion U.S. economy has the euro region’s largest public debt at 115.8% of gross domestic product and must finance more than 150 billion euros in maturing bonds this year.
