Markets are still pointing to Italy for its financial weaknesses

Markets are still pointing to Italy for its financial weaknesses. Moody’s debt rating agency warned this Tuesday that it is the only European country whose bonds are on the brink of a “junk” classification. Italy has never lost “proven”, which in technical jargon is known as “investment quality”.

Italy is currently the only one [estado] Sovereign with a Baa3 rating with a negative outlook,” said Moody’s report, which had access to. Precisely, this note on the debt of the country led by the far-right Giorgi Meloni is only one step above this “worthless” rating.

The agency will renew the Italian note on May 19. And, in practice, if it ends up being cut, the country could face major self-financing problems at a time when the need to cover government spending that is not reaching revenue due to the Russian invasion is still very high. Ukraine, and the inflationary crisis it fueled, is fully recovering from the shock of the pandemic.

Italy’s deficit (imbalance between spending and revenue) remained at 8% of GDP (gross domestic product) in 2022, compared to 4.8% in Spain or 4.7% in France. And the IMF (International Monetary Fund) expects this to continue in 2023 in 3.7%forehead to 3.5%, which he estimates for our country.

Budget imbalances are not Italy’s biggest weakness. Debt, the ratio of debt to GDP, closed at 144% last year, falling to 113% in Spain. And the growth forecasts for our economy are even better.

Debt is the first indicator that is observed to measure the financial sustainability of a country. It depends on both the numerator (debt) and the denominator (GDP). For this reason, although the total public debt continues to rise, the debt is falling due to economic growth.

Another way to measure the debt burden is to compare interest costs to government revenues, and in this picture Spain is worse than Germany or France, but much better than Italy. And it is observed that the increase in our country has also been restrained in the last two years, despite the increase of the official interest rates of the European Central Bank (ECB) to fight against inflation.

“There are bigger risks with Italy’s recovery plan [los fondos europeos] Not fully implemented due to weak administrative capacity of some local governments, constraints in labor and product markets, high inflation and the fact that some projects turned out to be more ambitious than originally expected,” Moody’s added in your report.

“Slow growth and high funding costs could further damage Italy’s fiscal position.” Although significant steps have been taken to reduce gas consumption and diversify supplies from Russia, significant dependence remains on the risk of shortages and further price escalation,” the debt rating agency continues.

Results for Italy

The “notes” of other firms like S&P, Fitch or DBRS, Moody’s are less pessimistic about Italy and are two levels above the junk rating. In fact, one “failure” won’t directly affect you, as the ECB’s bond-buying programs keep sovereigns “eligible” if at least one of the four major rating agencies deems them investment grade.

At the moment, the situation in the financial markets does not reflect more tensions compared to other partners of the euro. First, because of the flexibility that the ECB has shown in dealing with the threat of “fragmentation”. In other words, the danger that a country will suddenly suffer a much higher cost of financing than the rest.

On the other hand, the European Union continues to negotiate its new fiscal rules, which have been suspended by the pandemic, in the expectation that they will be more affordable for the most over-indebted countries.

Source: El Diario





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