S&P downgrades Italy debt outlook

Decision indicates the debt grade could be lowered further in the coming months

Ratings agency S&P has downgraded its outlook for Italy’s sovereign debt but left its credit rating untouched, upping the pressure on Rome amid a stand-off with Brussels over its budget.

The announcement, which warned Rome’s fiscal policy was jeopardising banks’ ability to fund the Italian economy, followed last week’s decision by Moody’s to cut Italy’s credit rating to a notch above junk status.

“The negative outlook reflects the risk that the government’s decision to further increase public borrowing — besides exacerbating Italy’s already weak budgetary position — will stifle the incipient recovery of the private sector,” S&P said.

The decision indicates the debt grade could be cut in the coming months.

The far right League and anti-establishment Five Star Movement, ruling in coalition, have refused to curb their big spending programme which forecasts a public deficit of 2.4 per cent of GDP in 2019.

The former centre-left government had pledged to keep next year’s deficit to 0.8 per cent of GDP in a bid to ease Italy’s vast public debt, which amounts to a phenomenal €2.3 trillion (Dh9.63 trillion).

Brussels on Tuesday rejected the new plan outright, accusing Rome of “openly and consciously going against commitments made” and requesting a revision.

But the ratings decision was met with a renewed refusal to budge by League head Matteo Salvini and Five Star chief Luigi Di Maio. “Are ratings agencies unaware of the global financial crisis?” Salvini said on Friday, while Di Maio said such organisations “do not measure the wellbeing of a country’s citizens”.

“We will continue! Change is underway,” added Di Maio.

The Moody’s downgrade, cutting Italy’s debt grade to Baa3 from Baa2 — while setting the outlook at “stable” — came as international financial watchdogs sounded the alarm over Italy’s economic choices.