Don’t Be Obsessed With Debt, Moody’s Tells Italy’s Towns

  • Moody’s country head praises government progress on reforms
  • Local governments can start spending again after ‘homework’

Italy’s economy is on the mend and after years of austerity local governments will be able to start spending again on services, infrastructure and other municipal projects this year without obsessing about debt, Moody’s Investors Service analysts say.

“Everyone looks at debt-to-GDP, but you don’t have to be obsessed with this indicator,” Mauro Crisafulli, Moody’s Italy country head, said in an interview in Rome on May 27. “While important, what matters is economic growth and this is slowly picking up in Italy, even if at a slower pace compared to the rest of Europe.”

Italy, the euro region’s third-biggest economy, is gradually recovering from its longest recession since World War II though in 2015 it still had a public debt burden of 132.7 percent of gross domestic product, the second-highest ratio in the euro area. Moody’s sees Italian GDP growing 1.2 percent in 2016, slightly above the International Monetary Fund projection.

The pickup in the country’s financial health is best seen in an improving outlook for sub-sovereign entities which are now able to put money into various projects.

“Italy’s local governments have done their homework -- local balance sheets are leaner and more transparent,” Massimo Visconti, senior credit officer in Moody’s Public Sector Europe team, said in the same interview. “Italy’s local governments can start investing again.”

Recovery Continuing

Moody’s rates Italy at Baa2, two levels above non-investment grade or “junk,” with a stable outlook, reflecting expectations that the country’s slow economic recovery will continue.

“The government has made progress to advance structural reforms with regard to the labor market, the banking system, the administration, the electoral system and the institutional set-up,” Crisafulli said. He said this positive structural reform momentum is behind Moody’s stable outlook on Italy.

Moody’s outlook remains robust when it comes to many of the country’s local governments. The agency sees the outlook for most of those under its watch as stable. It rates the cities of Milan and Venice as Baa2, the same level as the central government, while Naples is pegged below investment grade at B1.

The rating agency expects investments by local government to pick up again in 2016 with positive spillover to the central government and the country as a whole, Visconti said.
The agency forecasts regional governments will need modest annual external funding of as much as 2 billion of euros ($2.2 billion) between 2016 and 2018 due to spending restrictions.

While most European countries are tapping into capital markets to fund these investments, Italian local governments are 85 percent financed by the government and state-lender Cassa Depositi e Prestiti, Visconti said.

Investor Appetite

With public spending now under control, international investors are showing interest in local bonds, which are available on the secondary market, the Moody’s analysts said.

“Investors are interested in how things are going on the labor market and in public administration reforms. There’s little information available outside Italy on this. Sectors which were an issue only a few years ago, like health spending, are under control now,” said Crisafulli.

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