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Moody's: today the rating on Italian debt. BTP and spread under control, the market believes in a confirmation

Despite making their hopes due to the date, but also due to the unpredictability of the US agency, analysts are quite optimistic. But a downgrade would push the spread to 250 bps and other serious consequences. Let's see which ones

Moody's: today the rating on Italian debt. BTP and spread under control, the market believes in a confirmation

On the eve of the pronouncement of Moody's on the Italian sovereign rating tonight, Friday 17 November, the bond market, the first to react to a possible negative action, shows optimism. The Ten-year BTP below 4,4% quota and the spread at 175 basis points.
The stakes are not small. The US agency currently has a Baa3 rating on Italy with a negative outlook and a negative rating would cause the Italian debt to fall into the "non-investment grade" area, (or Junk), which would have many repercussions on the market.

Fitch, Dbrs and S&P's have already spoken out, leaving the status quo

But, despite making the spells, also seen on Friday the 17th, most observers are quite optimistic, after Fitch, Dbrs and S&P's have spoken out in recent weeks by leaving the rating and outlook remain unchanged, i.e. the prospects, on Italy's sovereign debt, despite all three reporting a slowdown in the economy. Last October 20th S&P Global Ratings confirmed the “BBB” rating for Italy with stable prospects. October 27th Dbrs left the “BBB high” rating unchanged with a stable trend. On November 10 the agency Fitch maintained its “BBB” rating with a stable outlook. Fitch he also underlined that the current executive can count on a "more stable parliamentary majority than previous administrations" even if it faces "considerable political pressure to better maintain its electoral commitments".

With Moody's, however, one must take his into account unpredictability of judgements. US President Joe Biden knows something about this and saw his "triple A" rating confirmed but, surprisingly, the outlook was cut from stable to negative.

It makes us think that when the same agency threatened to cut the Italian rating in 2011, triggering the sovereign debt crisis in Europe and the rise in the spread, it was also that case on Friday 17th (June).

Moody's rating: observers are mostly optimistic

“Moody's could follow the other agencies by confirming ratings and outlook based mainly on the impact on the growth of the PNRR” says Antonio Cesarano, Chief Global Strategist of Intermonte.
Analysts at are of the same opinion Unicredit: “The historical data and projections, Unicredit writes in a recent report, appear consistent at least with a confirmation of the judgement, also in light of the resilience demonstrated by Italy to recent shocks, such as the energy one”. Also in favor of confirmation are "the recent improvements" in the implementation of the Pnrr, the "positive" news on the political situation, "the improvements" in the indicators of the foreign trade balance and "the progress" in the solidity of the banking system.

There are also those who do not rule out that the US agency could even bring the outlook back to stable. “We expect no rating action from Moody's on Friday the 17th and believe a downgrade is highly unlikely; rather we see a change to neutral from negative in the outlook”, predicts Alessandro Pellegrino, credit portfolio manager of Arcane Partners.

Rating: spread at 250 bps if a rejection arrives

Instead, a possible downgrade would have significant repercussions in Italy, but also on the entire European market. An initial reaction could be the rise in yields on Italian government bonds and an increase in the spread up to 250 bps, according to observers. “If Italy's rating were to slip below investment grade,” says a study by Barclays, “the spread between BTPs and German Bunds, which is now hovering around 175, “could test” the 250 basis point threshold.

A first consideration to make would concern the fact that if interests rise, the cost of debt will further increase for the Italian state which has a mass of securities on the market that exceeds 2 thousand billion euros. Furthermore, some investment funds that cannot hold junk securities should pour them onto the market. Even the European Central Bank by statute can only purchase securities with non-speculative classifications, but unanimity of judgment between the relevant agencies would be necessary to block their operations.

He is more cautious about reactions Cesarano who, in the case of a downgrade, observes that: “It could happen in the very short term volatility on the spread, but I think then he could come back, given that the other three agencies confirmed ratings and outlooks. In any case, it would also be an important signal for the final phase of approval of the budget law, as well as for the negotiations on the new stability pact” he says.

Contagion effect on Italian banks and insurance companies

In case of downgrade they would naturally pay the price all Italian companies, because it is difficult for companies to have a credit rating higher than that of their country of origin. They make exceptions for now only Eni and Exor which both have an A- rating from S&Ps.

“Il contagion it would be immediate, especially starting from banks and insurance companies" says Pellegrino again. But, if the spread were to go up to 250 points, "the ones who would be penalized above all would be banks, given that “they have a predominantly domestic business and have significant shares of government bonds on their balance sheets. Furthermore, their cost of financing would rise rapidly, impacting profits. Furthermore, banks themselves are today highly dependent on the market for financing. At the same time there would be negative implications for the European financial sector (iTraxx Financials)".

Utilities would be less affected. Eyes on the euro area

However, the effect on the utilities because, if it is true that their cost of debt increases, it is also true that these companies “have more stable businesses, with recurring revenue. And above all, they have no bonds on their balance sheets,” continues Pellegrino. “Finally, the rise in the spread to 250 basis points in Italy could rekindle fears of possible contagion to other southern European countries, once again raising doubts about the financial stability of the the euro area“, concludes Pellegrino.

The key points on which Moody's rating is based

In issuing Moody's had highlighted its negative outlook three critical issues: the energy crisis, the high debt in the face of slow growth, the lack of "structural reforms". In the meantime there was the presentation of the Budget law which is largely deficit financed but which does not appear to have numbers capable of upsetting the state of public finances. In its ratings Moody's tends to focus above all on debt as a percentage of the gross domestic product, a historic Italian weak point with a ratio of around 140%. This level, however, is now not very far from the values ​​of France or Great Britain which in recent years have broken through the 100% mark and with which Moody's has not been particularly severe.

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