Italy’s Credit-Rating Outlook Raised to Stable by Moody’s

Italy’s credit rating outlook was raised to stable from negative by Moody’s Investors Service, which cited the government’s financial strength and reduction of risks from contingent liabilities.

Moody’s also affirmed Italy’s Baa2 and Prime-2 debt ratings, saying in a statement it expects a leveling-off of the nation’s debt-to-gross domestic product ratio this year. The risk from liabilities are reduced by the potential recapitalization needs of Italian banks, loans by the European Financial Stability Facility and the European Stability Mechanism, Moody’s said.

Italy’s economy expanded in the three months through December, marking the first quarterly gain in more than two years as the country began to recover from its longest recession on record. GDP in the fourth quarter increased 0.1 percent from the previous quarter when it was unchanged, the national statistics institute Istat said in a preliminary report in Rome yesterday.

“We see a significant resilience in the government’s financial strength” and more stability across Europe is providing a “tailwind,” Dietmar Hornung, associate managing director at Moody’s in Frankfurt, said in a phone interview. “At the same time, we highlight that the growth outlook is quite subdued.”

Italian bonds have rallied during the past 18 months as the euro area’s debt crisis eased.

Previous Cuts

In July 2012, Moody’s cut the nation’s credit rating by two steps to Baa2 from A3, or two levels above junk.

Italy’s credit rating was lowered to BBB, also two levels above junk, on July 10 by Standard & Poor’s, which cited a weakening of economic prospects. In March, Fitch Ratings downgraded Italy’s long-term debt to BBB+ from A- with a negative outlook.

Italian borrowing costs dropped to a record low at a sale of three-year debt on Feb. 13 as investors shrugged off rising tensions that led to the resignation of Prime Minister Enrico Letta.

Letta’s departure and “the expectation that Matteo Renzi will head a newly formed government does not alter Moody’s expectations in this respect,” the ratings company said in the statement.

Before yesterday’s Moody’s announcement, yields on Italy’s 10-year bonds were 3.7 percent, down from 3.71 percent the previous day. The spread over comparable German bunds was 200.8 basis points.

S&P, Moody’s

In almost half the instances, yields on government bonds fall when a rating action by Moody’s and S&P suggests they should climb, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back as far as the 1970s. When S&P downgraded the U.S. government in August 2011, bonds rose and pushed Treasury yields to record lows.

Ratings remain under pressure more than four years after the outbreak of the European debt crisis, which led the EU to offer emergency financing to Greece, Ireland, Portugal, Spain and Cyprus to shore up their bonds and banks.

European Central Bank President Mario Draghi’s pledge to do what it takes to save the euro has helped stabilize debt markets, while deficits and debt in most euro-area countries remain well above the limits set for membership in the single currency.