Europe: The Week Ahead (Feb 18-22), Italy's Leaning Tower Of Debt

By Steven Levine, Senior Market Analyst, Interactive Brokers

Italy’s massive amount of sovereign debt has helped keep the country’s credit rating on the cusp of junk status, while political uncertainties and a fragile financial sector have served as strong headwinds.

The nation’s domestic policy challenges, its strife with the fiscal rules of the European Union, as well as other structural concerns, have generally eaten into its economic landscape, hampering its future growth prospects.

Fitch Ratings analysts Douglas Winslow and Michele Napolitano recently noted that Italy’s GDP growth has “stalled as domestic policy uncertainty and weaker external demand has dragged down investment, while private consumption growth has also lost momentum.”

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Fitch’s outlook for GDP growth for 2019 dropped to 0.3% from 0.8% in 2018 -- and much lower than the 1.2% it expected for both years at its previous review in August, with investment growth having fallen to 0.4% from 3.8% last year.

The ratings agency also anticipates an increase in general government debt to 132.3% of GDP in 2020 from 131.7% in 2018, driven by lower nominal GDP growth, and a 0.7pp weakening in the primary balance from 2018-2020. This compares with Fitch’s current 'BBB' median of 38.5% of GDP and would leave Italy as “one of the most highly indebted sovereigns we rate, exposed to downside risks and with reduced scope for counter-cyclical fiscal policy.”

Fitch recently confirmed its ‘BBB’ sovereign credit rating on Italy with a negative outlook – only two notches away on the agency’s credit rating latter from junk status.

Winslow and Napolitano further pointed out that coalition differences and the “absence of a well-defined economic policy agenda in our view contribute to investor uncertainty but also reduce the
likelihood of a more far-reaching reversal of structural reforms.”

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Disclosure: The author does not hold any positions in the financial instruments referenced in the materials provided.

The analysis in this material is provided for information only and is not ...

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