Monday, March 11, 2013

Fitch Downgrades Italian Debt

First, an important caveat: I don't like or really trust the ratings agencies.  S&P was one of the primary enablers of the credit crisis, essentially selling their reputation for favorable bond ratings.  And the other ratings agencies aren't much better.  More importantly, these agencies allow portfolio managers at not inconsequential institutions to become lazy in their fiduciary function.

I'm including the following points because they are the type of points that would lead any investor to sell a particular sovereign debt security.  They also point to the fact that the Italian situation is the latest speed bump for the EU:

- The inconclusive results of the Italian parliamentary elections on 24-25 February make it unlikely that a stable new government can be formed in the next few weeks. The increased political uncertainty and non-conducive backdrop for further structural reform measures constitute a further adverse shock to the real economy amidst the deep recession.

- Q412 data confirms that the ongoing recession in Italy is one of the deepest in Europe. The unfavourable starting position and some recent developments, like the unexpected fall in employment and persistently weak sentiment indicators, increase the risk of a more protracted and deeper recession than previously expected. Fitch expects a GDP contraction of 1.8% in 2013, due largely to the carry-over from the 2.4% contraction in 2012.

- Due to the deeper recession and its adverse impact on headline budget deficit, the gross general government debt (GGGD) will peak in 2013 at close to 130% of GDP compared with Fitch's estimate of 125% in mid-2012, even assuming an unchanged underlying fiscal stance.

- A weak government could be slower and less able to respond to domestic or external economic shocks.