Fitch af­firms Italy’s Re­gion of Lom­bardy

The Pak Banker - - Front Page -

LON­DON

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.

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