Fitch affirms Italy’s Region of Lombardy
Global rating agency Fitch has affirmed the Region of Lombardy’s Long-term foreign and local currency ratings at ‘A-’ and Short-term foreign currency rating at ‘F2’. The Outlooks for the Long-term ratings are Negative, mirroring those on Italy’s sovereign rating. The rating action affects financial debt outstanding of about EUR2.3bn, including USD1bn of bonds (ISIN US541624AA07), and future direct borrowing.
The ratings reflect Fitch’s continued expectations of an underlying operating balance of about EUR0.5bn, or 2.5% of the budget size, amid a stock of financial debt hovering around EUR2.3bn as the balanced budg- et rule to be effective in 2014 will likely lead to a substantial freezing of net borrowing. Lombardy’s ratings remain constrained by Italy’s as under Fitch’s criteria a subnational cannot be rated above the national government lacking substantive financial autonomy.
The 2.5% operating margin is rather low by international standards yet it covers debt servicing requirements by 2x. Although the 2011 budget outperformed expectations as the operating balance stood close to EUR1.3bn rather than the Fitch projected EUR0.5bn, the agency believes it will be eroded in 2012-2013 following cuts in regional revenues instrumental to the national efforts to achieve a cyclically adjusted balanced budget by 2013.
Economic contraction of about 2% in 2012 and likely stagnation in 2013 will keep Lombardy’s tax revenues rigid and hovering around EUR20bn, in line with 2011. Though declining, the operating surplus hinges upon the strict control of spending which in 2011 contracted by about 1%. Fitch continues to believe that Lombardy’s capital spending will eventually decline towards EUR1bn, or 5% of the budget size, from about 8% over the 2006-2010 period as the rigidity of the operating budget makes the size of investment more contingent upon borrowing. Although the latter is being constrained by the balanced budget rule, Fitch believes that law offers.