Spendthrift Italy risks credit downgrade
ITALY’S populist government has defied Brussels by pressing ahead with a spending splurge and faces the risk of being downgraded by credit ratings agencies, economists fear.
Share prices in Italian banks, which are large holders of the nation’s debt, dropped heavily yesterday after the budget proposals were set out. The fall appeared to confirm fears that a “doom loop” link, between financial systems and government bonds, remains strong in the eurozone a decade on from the financial crisis. The impact was felt across Europe with falls in German and French markets. Italy’s credit rating is only two ranks above socalled junk bond status.
Investors have grown concerned about the country’s debts and the wider implications for the eurozone. Spending plans unveiled by the ruling coalition of Five Star and Lega parties are heightening fears that debt could spiral out of control in order to fund a lower retirement age, citizens’ income, and lower taxes.
The FTSE MIB, the benchmark for the Italian national stock exchange, fell 4.4pc yesterday in the wake of the proposed budget before recovering slightly. Spreads between 10-year German and Italian bonds, used as an indication of the relative riskiness of the two countries’ debt, widened considerably to a three-week high.
David Owen, of Jefferies International, said: “The European Central Bank won’t do anything [to help stabilise the economy] at the moment. They will hope that bond spreads will keep opening out putting pressure on government to correct things.
“I think the big risk would be if one of the ratings agencies comes out and downgrades Italy and then everyone will be [watching for an Italian exit from the EU].”