S&P Downgrades Italy; Euro, Futures Tumble
The negative outlook reflects Standard & Poor’s view of risks to the Italian government’s fiscal targets over 2011-2014, as well as the uncertainties on the timely implementation of growth-enhancing reforms. In our view, these risks would stem from weaker output growth than we currently assume in our revised base case. In addition, political gridlock could contribute to delayed policy responses to new macroeconomic challenges and result in significant fiscal slippage.
If one or more of these risks materializes, Italy’s net general government debt could increase from its already high level. In that event, we could lower the long- and short-term ratings again. We could also lower the ratings if, against our expectations, the current account deficit remained higher than 10% of current account receipts beyond 2013. This would occur if Italy’s trade balance did not improve or if the income deficits continued to widen because of rising refinancing costs.
On the other hand, if the government manages to gather political support for implementing growth-enhancing structural reforms, which in turn increase prospects for a material reduction in the net public debt burden in the medium term, we could affirm the ratings at the current level.
As is typical, ratings on issues and issuances dependent on these long- and short-term ratings may be revised as a result of today’s rating action.
Futures not happy:
U.S. Stock Futures Extend Losses After Italy Cut
U.S. stock futures extended losses after Italy’s credit rating was cut one level to A by Standard & Poor’s, reinforcing concern Europe’s debt crisis will spread.
Standard & Poor’s 500 Index futures expiring in December slumped 0.7 percent to 1,189.10 at 8:38 a.m. Tokyo time. The measure retreated 1 percent today, following last week’s 5.4 percent advance that was the third-biggest rally since 2009.
The rating for Italy, which has Europe’s second-largest debt load, was lowered from A+, S&P said. The firm said Italy’s net general government debt is the highest among nations with A ratings, and the amount will peak later and at a higher level than previously anticipated.
“Italy’s downgrade adds to fears of a domino effect,”Richard Sichel, who oversees $1.6 billion as chief investment officer at Philadelphia Trust Co., said in a phone interview. “It’s definitely not good timing especially because of the lack of positive news. That’s enough to make investors nervous.”
