Moody's cuts Italy's credit rating one notch; stable outlook

Frederick Owens
October 21, 2018

EU Commission chief Jean-Claude Juncker said the EU has always been generous with Italy when it comes to assessing its budget, and that EU leaders had already approached him to make sure not to be too flexible on strict deficit and debt levels when combing through the details of Italy's spending plans.

Italian Premier Giuseppe Conte, who is due to meet Putin in Moscow next week, has also slammed the sanctions, saying: "They damage our companies, which we intend to protect, as well as Russian society". The increase suggests investors are more nervousness about the impending budget showdown with the EU.

German chancellor Angela Merkel told reporters after the meeting that Conte briefed her on reforms, from the fight against corruption to the transparent digital structure of public administration, but that on the budget, Italy needs to engage in a "positive dialogue" with the European Union commission.

The spread between yields on Italian and German bonds climbed to its highest level in nearly five years on Friday.

Moscovici told reporters that European partners want to see Italy remain "firmly in the center of Europe", and that Italians themselves consider the euro currency "very important".

Italy is the third-largest economy in the 19-country euro zone, and a crisis there could unsettle the entire bloc.

"There is no discrimination against Italy", Moscovici said during a press conference alongside Tria.

The concerns about the budget Italian, however, have pushed the rating agency Moody's to lower Friday night the rating of Italy by one notch to "Baa2" to "Baa3", the last level of investment grade.

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"We all know that the situation is delicate and we don't want to create more tensions", Moscovici said.

The decision cited "material weakening in Italy's fiscal strength, with the government targeting higher budget deficits for the coming years", as well as debt holding near the current 130 percent of GDP "rather than start trending down as previously expected".

But the country's populist coalition government has done the opposite - offering a draft budget that boosted overall spending.

"The economic plans of the government, while supportive of growth in the near term, do not amount to a coherent programme of reforms that will lift Italy's mediocre growth performance on a sustained basis", it said.

Luigi Di Maio, the head of the 5-Star Movement, on Thursday threatened to lodge a formal criminal complaint.

Conte, in a post on Facebook Thursday, said that the measures are "well-considered, well-constructed and well-realized", and he said the draft was "the only instrument that we have to ensure economic growth and social development to our country".

Additionally, Italian right-wing parties League of the North and Five Star Movement said expansionary fiscal policies mark a pivot to supply-side economics in Italy - which would reinvigorate the nation's manufacturing, agriculture, and encourage exports.

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