Italy Outlook Revised to Negative by S&P, Prompting Vow of Faster Reforms

Italy’s Treasury said it will “intensify” structural changes in the economy and push ahead with measures to balance the budget by 2014 after Standard & Poor’s said its debt rating is at risk of a downgrade.

“With regard to the economy, the government has initiated and will intensify its reforms; in regard to the budget, a phase of measures are in advanced preparation in order to balance the budget by 2014,” the Treasury said today in an e-mailed statement from Rome. It also said the measures will be submitted to the Parliament for approval by July.

Italy had its credit-rating outlook lowered to negative from stable by Standard & Poor’s, which cited the nation’s slowing economic growth and “diminished” prospects for a reduction of government debt, according to an S&P statement sent late yesterday. S&P affirmed Italy’s A+ long-term rating, the fifth-highest, and its top-ranked A-1+ short-term rating.

“What S&P is saying is that Italy’s economy is not growing because it has not undertaken structural reforms, and this lack of growth could make it difficult for the country to meet its commitments in the medium to long-term,” said Nicola Borri, who teaches economics at Rome’s Luiss University. “They’re not saying we’re like Greece and Portugal now, we’re OK for now, but we need to reform or there will be trouble down the line.”

‘Weak’ Growth Prospects

Italy’s “current growth prospects are weak, and the political commitment for productivity-enhancing reforms appears to be faltering,” S&P said. “Potential political gridlock could contribute to fiscal slippage. As a result, we believe Italy’s prospects for reducing its general government debt have diminished.”

The Italian Treasury ruled out “absolutely” the risk of political gridlock highlighted by S&P and said Italy will keep all its economic commitments. It also pointed out that S&P’s views are very different from those expressed by the International Monetary Fund, Organization for Economic Cooperation and Development and the European Commission.

The Italian economy expanded 0.1 percent in the first quarter, less than economists had estimated, as gains in exports failed to offset weak domestic demand. The euro region’s third- biggest economy won’t return to its pre-recession level for at least another two years, and the $2.3 trillion economy needs to raise productivity, the OECD said this month in a report.

‘Bottlenecks and Rigidities’

In Italy, “diminished growth prospects stem from what we consider to be a lack of political commitment to deregulating the labor market and introducing reforms to boost productivity,” S&P said. “We believe measures to reduce the bottlenecks and rigidities in Italy’s economy are especially important in light of Italy’s limited monetary flexibility.”

The negative outlook implies a one-in-three chance that Italy’s ratings could be lowered within the next 24 months.

Fitch Ratings yesterday cut Greece’s long-term debt rating to B+, four notches below investment grade, and placed it on rating watch negative. Even a voluntary extension of the country’s bond maturities would be considered “a default event,” the rating company said in a statement. Greek 10-year bond yields surged to a record 16.6 percent.

Greek Sovereign Debt

The euro fell versus the dollar for the first time in five days as a policy maker for the European Central Bank said it may not be able to accept Greek sovereign debt as collateral if the bond maturities are extended.

The European currency weakened 1.1 percent to $1.4161 at 5 p.m. in New York yesterday, cutting a weekly gain to 0.3 percent, after earlier advancing to $1.4346, the strongest level since May 11. The euro sank 0.9 percent to 115.69 yen, after gaining to as much as 117.17. The Japanese currency slipped 0.1 percent to 81.70 per dollar.

On May 5, Prime Minister Silvio Berlusconi’s cabinet, aiming to spur growth and productivity in the economy, passed a plan to cut bureaucracy and offer tax breaks for companies that invest in research. Finance Minister Giulio Tremonti, who avoided the kind of stimulus policies that inflated budget deficits in other euro nations, said the plan won’t require any increase in spending.

The government last month cut its forecast for economic growth in 2011 to 1.1 percent and in 2012 to 1.3 percent from previous estimates of 1.3 percent and 2 percent respectively.

To contact the reporter on this story: Ian Katz in Washington at ikatz2@bloomberg.net; Alessandra Migliaccio at amigliaccio@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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