Italy confident despite downgrade

2011-05-22 14:39

Rome - Italy on Sunday sought to allay fears it could join its fellow southern Europeans Greece and Portugal in the financial mire, questioning Standard & Poor's downgrade of its forecast to negative.

Finance Minister Giulio Tremonti described S&P's decision as "strange" and said the ruling lacked "even one example of a decline in the economy or public finances to justify downgrading the forecast," according to the Corriere della Sera.

The Treasury issued a statement Saturday saying Italy would "respect its commitments," adding: "Economic growth and public accounts have been constantly better than expected."

S&P downgraded its rating outlook for Italy from "stable" to "negative" amid concerns that the fragility of the government's centre-right coalition would hamper attempts to slash the country's vast debt.

"In our view Italy's current growth prospects are weak, and the political commitment for productivity-enhancing reforms appears to be faltering," S&P said.

"Potential political gridlock could contribute to fiscal slippage. As a result, we believe Italy's prospects for reducing its general government debt have diminished," it said.

Despite political infighting in Italy, where the scandal-hit Prime Minister Silvio Berlusconi recently suffered an embarrassing setback in local elections, Tremonti denied outright the risk of a "political gridlock."

The negative forecast leaves Italy with a one-in-three chance its credit rating could be downgraded within the next 24 months.

The prospect has sparked fears in some quarters that the debt crisis in other areas of the eurozone could spread to Rome.

Greece and Portugal have already been given multi-billion dollar bailouts while Spain has been battling to convince markets that its economic woes will not force it to go cap in hand to the European Union and International Monetary Fund.

"Are we going to return to the hellish circle of PIGS?" the Repubblica daily asked in a reference to the controversial acronym used to sum up the troubled regions of the eurozone.

"Debt - the country's real underbelly - is for the markets what the smell of blood is for vampires, and Italy is a sought-after prey," it said.

But Italy's finance newspaper, Il Sole 24, said the Italian economy "will remain secure. The core has not been shaken by the crisis, unlike the 'PIGS'."

Economist Giampaolo Galli, director general of Italy's Confindustria told Il Sole 24: "It is a clear warning about the health of the Italian economy."

Galli said however that he didn't expect the downgrading to have much effect on investors: "The markets know Italy has problem with its public accounts, with poor growth. This sort of situation was predictable," he said.

The Treasury said in its statement that the European Commission, International Monetary Fund and OECD had given assessments on Italy this month that were "very different" from S&P's.

The IMF had described Italy's growth as "modest" but had called for "bold" structural reforms, warning that the country's per capita GDP has not grown in the last 10 years in "one of the worst performances among advanced economies."

The Organisation for Economic Cooperation and Development said Italy must reform to boost its slow growth and warned that with bond markets jittery and a high debt level, it was "crucial" Rome bring its budget back into balance.

Italy has one of the highest levels of public debt in the world - 120% of GDP - but has succeeded in reducing its deficit. The government has forecast 1.1% growth in 2011.