Well ,since Romano Prodi is quoted as saying that "today's downgrade of Italy's credit rating by Fitch Ratings to AA-, from AA, was fully expected". I suppose there is nothing to worry about, everything is under control, now isn't it:
Italy's credit rating was lowered by Standard & Poor's and Fitch Ratings, a blow for Prime Minister Romano Prodi who pledged to trim the government's debt and deficit to defend the nation's creditworthiness.
S&P today cut Italy's rating to A+, the second-lowest of the dozen nations using the euro after Greece, saying his budget plan doesn't do enough to cut spending. Fitch trimmed to AA- from AA. The decision comes at a time rising European interest rates are raising financing costs and sent Italy's bonds lower.
``Ironically, to the extent that it raises Italy's borrowing costs, the downgrade makes it more difficult to reduce the debt and deficit,'' said Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York.
Prodi, in office in May, had tried to stave off a rating cut with a draft budget that includes 34.7 billion euros ($43.5 billion) in spending reductions and revenue-raising measures. Prodi said the plan would bring the deficit back within European Union limits and lower the EU's biggest debt, currently worth almost 1.1 times Italy's $1.8 trillion gross domestic product.
The nation's debt ranks third in the world behind Japan with $6.4 trillion of sovereign marketable securities and the U.S. with $4.2 trillion of Treasury bonds and bills.
In a way Prodi is right, there is nothing especially starling, or even surprising about this decision, indeed the whole thing does have a smack of inevitability about it. What will the downgrade mean? Well in the short run not a lot. What are called spreads (the differential between the effective interest rate sellers of Itaian bonds have to offer when compared with German ones) have of course widened, but this is relatively small beer:
The spread of Italy's benchmark 10-year government bond yields widened compared to the German bund equivalent, after Fitch and Standard & Poor's downgraded Italy's debt ratings, market sources said.
Italy's 10-year bond yield premium widened to 28.2 basis points following the S&P downgrade, after widening to 27.8 on the earlier Fitch downgrade. It opened this morning at 26.5, they said.
Methinks Prodi is just a touch too cynical in saying this was entirely expected since S&P's explicitly stated that said the budget doesn't do enough to cut spending and relies too much on growing tax revenue to lower the deficit.Is he really saying that his inability to draw up a budget which was up to the demands of the situation was also forseeable back in May. Perhaps it was, but he shouldn't be the one to be saying this.
On another reading this downgrade can work to Prodi's advantage:
``Developments will now heavily depend on whether Prime Minister will decide to leverage on the downgrade to re-balance the budget, risking a clash with the radical left wing of the coalition, which will strenuously defend the current draft version,'' said Paolo Pizzoli, an economist a ING Bank NV in Milan.
Prodi said in an e-mailed statement that he had shared the same concerns that Fitch expressed in its note when he took over Italy's finances after winning elections in April.
``We are certain that the next judgments, the ones that will take into account this government's economic policy and not the policy left behind by the previous government, will register positively,'' Prodi said.
Fitch praised the government's ``commitment to fiscal responsibility,'' but added the administration will ``find it hard to implement the tough fiscal reforms necessary'' to raise the primary surplus enough to curb debt. S&P was more critical of the spending plan, saying ``the budget bill does little to drive forward on meaningful supply-side reforms, and will actually lead to net increases in spending as a share of GDP, instead of curtailing high current expenditure, which is the root cause of Italy's fiscal imbalance.''
I am however less than entirely convinced that a downgrade from a couple of ratings agencies will do much to convince a voting public who are not already convinced by the possibility that their pension funds could become insolvent.
At the end of the day all of this is playing with fire. The problem isn't this downgrade (which may or may not have been already factored in). The problem is the danger of a subsequent one, and what the ECB may then be forced to do if this happens. As I argue here, and Nouriel Roubini suggests here, playing chicken is a dangerous game. The ECB has explicitly stated that it will not accept government paper (bonds) in the future from any country which has not maintained at least an A- rating from one or more of the principal debt assesment agencies. Well, Italy is now at AA-.
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