In October, two rating agencies struck down Italy’s credit ratings: Fitch lowered the republic’s long-term debt rating to AA–; Standard & Poor’s now has it at a lowly A+.
Cue bond traders selling billions of BTPs? No – the market hardly blinked. Fitch’s move, which was widely expected, was based on its concerns that the government would not be able to reduce debt levels in the coming years commensurate with maintaining a double-A rating.
Prime minister Romano Prodi’s government is making some attempt to raise revenues, but the rating agencies are most concerned about levels of spending. Ever since 2005, when Italy’s debt-to-GDP ratio increased for the first time in 10 years, the republic’s politicians have been on borrowed time. A failure to address the structural deficit aggressively enough in the latest budget proposals provided Fitch and S&P with ample ammunition to strike.
Contrast this with the judgment over at Moody’s Investors Service, where there appear to be few signs of anxiety. Italy remains unchanged at Aa2, with the agency seemingly not expecting the deficit or debt ratios to deteriorate in the next few years.
But plenty of economists believe that the current concerns only scratch the surface of the problem; that Italy is in deep, long-term trouble because of a catastrophic fall in productivity, a rapid rise in unit labour costs relative to the EU average and the failure of its politicians and ultimately its people to react to the environment of a single currency.