May 19, 2022

Fitch Downgrades Italian Debt, Citing Political Turmoil

ROME — The Fitch ratings agency cut its assessment of Italy’s sovereign credit by a notch on Friday, citing the abrupt emergence of fresh political turmoil that could push one of the euro zone’s most pivotal economies, already in a deep slump, into a further slowdown.

The lower rating of BBB+, down from A- before, was still within Fitch’s scale of debt considered to be of investment grade for bondholders. But the agency gave Italy’s debt a “negative” outlook.

An inconclusive national election late last month has thrown the government into gridlock, and Fitch said it was “unlikely that a stable new government can be formed in the next few weeks.” As a result, reforms needed to reverse an economic recession that Fitch described as one of the deepest in Europe seemed unlikely to be enacted any time soon.

The downgrade comes after Moody’s, a rival ratings agency, late last month warned that the risk of prolonged political uncertainty in Rome could have implications “well beyond Italy itself,” and could threaten the ratings of other members of the union.

The Italian economy is one of the hardest-hit in the euro currency union. It contracted 2.4 percent in 2012, compared with a 1.3 percent decline in Spain. Only Portugal, which shrank 3.2 percent last year, and Greece, whose economy contracted by 6.4 percent, fared worse.

Without growth, Italy will have a harder time paying down a €2 trillion, or $2.6 trillion, mountain of public debt, which Fitch forecast would rise this year to 130 percent of gross domestic product. That would be its highest level since World War I and one of the highest in the euro zone.

Last year, more than 360,000 Italian businesses closed their doors as banks refused to lend money and austerity measures, in the form of tax increases and spending cuts imposed by the former prime minister, Mario Monti, took a toll.

Italy’s unemployment rate hit a record high of 11.7 percent in January, the government reported Monday, while youth unemployment surged to 38.7 percent. Fitch warned it could downgrade Italy’s sovereign rating further if the recession ran deeper and longer than expected, or if the euro crisis heated up again.

Italy is effectively without a functioning government after the anti-establishment Five Star movement, led by the comedian-turned-activist Beppe Grillo, made stunning electoral gains in both houses of Parliament in last month’s elections. Mr. Grillo’s party has rejected an appeal by the Democratic Party leader Pier Luigi Bersani to work together to lead the country.

Without an alliance, the Italian government could limp along for as long as a year, political analysts say, before a likely collapse would force new elections. President Giorgio Napolitano is scheduled to meet next week with Mr. Grillo, Mr. Bersani and Silvio Berlusconi, the former prime minister who sought a return to power, to determine whether a new government can be formed.

A vote of confidence would then be held, probably later in March.

Italian media have speculated that a new caretaker government could be installed, in a manner similar to the move that put Mr. Monti in power in late 2011. But analysts say such a stop-gap government could not rule for long, nor would it be in a position to carry out painful economic reforms.

Both Mr. Bersani and Mr. Grillo have mostly ruled out joining with Mr. Berlusconi, meaning that an alliance between adversaries could be the main solution. But Mr. Grillo, who rode to victory on a wave of anger against what supporters see as a corrupt government, has instead heaped insults upon his rivals, and talked of razing the current system and replacing it with a more participatory democracy.

This article has been revised to reflect the following correction:

Correction: March 8, 2013

An earlier version of this article misstated the amount of Italy’s public debt. It is 2 trillion euros, or $2.6 trillion, not 2 billion euros, or $2.6 billion.

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