Political Instability Adds Pressure on Italy Rating, Fitch Says

The prospect of political instability in Italy following inconclusive elections last month adds pressure on the country’s bond rating as the euro area’s third-biggest economy contracts, Fitch Ratings said.

Instability “has the potential to disrupt policy making and reduce policy continuity, and to weigh further on an already weakening economy,” the rating company said in a statement in London today. “Fiscal consolidation alone, without economic growth, will not be sufficient to stabilize the debt-to-GDP ratio.”

While Italy under outgoing Prime Minister Mario Monti was able to bring its budget deficit within the European Union’s 3 percent of gross domestic product limit last year, the economy still shrank 2.4 percent in 2012, Italy’s statistics institute said today. That meant that the country’s debt load rose to 127 percent of GDP, the second-biggest in Europe after Greece.

The election on Feb. 24-25 failed to produce a governing majority in Parliament, spurring concerns that Monti’s mix of tax increases and spending cuts might be reversed by the next government.

“When we affirmed Italy’s ’A-’ rating with a Negative Outlook in December, we said that government instability and prolonged uncertainty over economic and fiscal policies and policy continuity was a potential downgrade trigger,” said Fitch. Italy’s long-term debt is rated A- by Fitch Ratings. It is rated Baa2 by Moody’s and BBB+ by Standard & Poor’s.

Italy has enjoyed a respite from the euro region’s crisis amid the austerity measures Monti passed in his 15-month tenure and European Central Bank President Mario Draghi’s commitment last year “to do whatever it takes to preserve the euro.”

Fitch said that it sees the ECB’s Outright Monetary Transactions program “as an effective potential shield against contagion risk in the eurozone.”

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