Moody’s Cuts Italy Rating

[scandal 951]

The premium of Italian 10yr to benchmark German Bunds pushed to a whopping 376bp and CDS doubled.

Investors are basically treating Italy as junk, even lower than the Aa2 rating given by Moodys.

It's just a question of time till Italy unravels too. Greece default is the beginning, not the end of PIIGS collapse.

Europe is coming apart at the seams.

http://www.bloomberg.com/news/2011-10-04/italy-s-rating-cut-by-moody-s-on-concern-country-may-struggle-to-trim-debt.html

Moody’s Cuts Italy Rating Following S&P on Weak Growth

Italy’s credit rating was cut by Moody’s Investors Service for the first time in almost two decades on concern the government will struggle to reduce the region’s second-largest debt amid chronically weak growth.

Moody’s lowered Italy’s rating three levels to A2 from Aa2, with a negative outlook, the New York-based company said in a statement today. The action comes after Standard & Poor’s downgraded Italy on Sept. 20 for the first time in five years. Italy was last cut by Moody’s in May 1993.

Italy gave final approval last month to a 54 billion-euro ($72 billion) austerity plan aimed at balancing the budget in 2013 that convinced the European Central Bank to buy the nation’s bonds. While the purchases initially brought down bond yields by about 100 basis points, Italy’s borrowing costs remain near record highs because of euro-area debt crisis contagion.

“The fragile market sentiment that continues to surround euro area sovereigns with high levels of debt implies materially increased financing costs and funding risks for Italy,” Moody’s said in the statement. “Although future policy actions within the euro area could reduce investors’ concerns and stabilize funding markets, the opposite is also increasingly possible.”

Moody’s decision “was expected,” Prime Minister Silvio Berlusconi’s office said in an e-mail today. “The Italian government is working with the utmost commitment to meet its budget targets.”

The yield on Italy’s 10-year notes was at 5.49 percent today, pushing the difference investors to hold Italian bonds instead of benchmark German bunds to 376 basis points. The cost of insuring Italian debt against default has more than double the level at the start of the year.

[웃 910]

From ZeroHedge

Moody's Downgrades Italy From Aa2 To A2, Negative Outlook - Full Text Of Three Notch Downgrade

And here we go again. Ironically, this is nothing. Wait until S&P, which just telegraphed very loudly the next steps earlier, puts France on downgrade review...

Moody's downgrades Italy's government bond ratings to A2 with a negative outlook

Prime-1 ratings affirmed

Frankfurt am Main, October 04, 2011 -- Moody's Investors Service has today downgraded Italy's government bond ratings to A2 with a negative outlook from Aa2, while affirming its short-term ratings at Prime-1. The rating action concludes the review for downgrade initiated by Moody's on 17 June, 2011.

The main drivers that prompted the rating downgrade are:

(1) The material increase in long-term funding risks for euro area sovereigns with high levels of public debt, such as Italy, as a result of the sustained and non-cyclical erosion of confidence in the wholesale finance environment for euro sovereigns, due to the current sovereign debt crisis.

(2) The increased downside risks to economic growth due to macroeconomic structural weaknesses and a weakening global outlook.

(3) The implementation risks and time needed to achieve the government's fiscal consolidation targets to reverse the adverse trend observed in the public debt, due to economic and political uncertainties.

The downgrade reflects the weight of these growing risks relative to some positive credit attributes. These include a lack of significant imbalances in the economy or severe pressure on private financial and non-financial sector balance sheets, as well as the actions undertaken by the government over the summer. Moody's notes that the size of the rating action is largely driven by the sustained increase in the country's susceptibility to financial shocks due to a structural shift in market sentiment regarding euro-area countries with high debt burdens. A country's susceptibility to shocks is a key factor under Moody's sovereign methodology.

The negative outlook reflects ongoing economic and financial risks in Italy and in the euro area. The uncertain market environment and the risk of further deterioration in investor sentiment could constrain the country's access to the public debt markets. If such risks were to materialise and the long-term availability of external sources of liquidity support were to remain uncertain, the country's rating could transition to substantially lower rating levels.

RATIONALE FOR DOWNGRADE

The downgrade stems from three closely related drivers:

1) The fragile market sentiment that continues to surround euro area sovereigns with high levels of debt implies materially increased financing costs and funding risks for Italy. The country is a frequent issuer with refinancing needs of more than EUR200 billion in 2012.

Although future policy actions within the euro area could reduce investors' concerns and stabilise funding markets, the opposite is also increasingly possible. Even if policy actions were to succeed in the short term in returning some degree of normality to euro area sovereign debt markets, the underlying fragility and loss of confidence is deep and likely to be sustained. As indicated by the A2 rating, the risk of default by Italy remains remote. Nonetheless, Moody's believes that the structural shift in sentiment in the euro area funding market implies increased vulnerability of this country to loss of market access at affordable rates that is incompatible with a 'Aa' rating. Moreover, the preponderance of downside risks and the potential for rapid rating transition which those risks imply are not compatible with a rating at the top end of the 'A' range. The repositioning of Italy's government bond rating to A2 reflects Moody's judgment of the balance of long-term risks facing the Italian sovereign. It is consistent with Moody's broader reassessment of sovereign risk in the euro area, focusing on member countries that are more susceptible to confidence-related shocks due to high public debt exposure and/or large fiscal imbalances.

2) The Italian economy continues to face significant challenges due to structural economic weaknesses. These problems -- mainly low productivity and important labour and product market rigidities -- have been an impediment to the achievement of higher potential growth rates over the past decade and continue to hinder the economy's recovery from the severe recession it experienced in 2009. These structural impediments to economic growth cannot be removed quickly. The government's reform plans have only just started to address some of these structural challenges, and they need to be implemented efficiently. Moreover, moderate medium-term growth prospects for the Italian economy have been further revised downwards due to potential adverse effects of a weakening European and global growth outlook. Economic growth will be a crucial factor determining the government's revenues, the achievement of fiscal consolidation targets and, ultimately, its debt trajectory.

3) Finally, there is increasing uncertainty for the government to achieve fiscal consolidation targets. Since more than half of the consolidation measures are based on government revenue growth, the plans are vulnerable to the high level of uncertainty around economic growth in Italy and elsewhere in the EU. Moreover, political consensus on additional expenditure cuts can be difficult to achieve. As a consequence, the government may find it challenging to generate the primary surpluses that are needed to place the public debt-to-GDP ratio and the interest burden on a solid downward trend. Moody's expects Italy's public debt-to-GDP ratio to reach 120% at the end of this year, up from 104% at the start of the global crisis. As well as posing a risk to Italy's financial strength, which is a key consideration under Moody's sovereign methodology, failure to achieve fiscal and debt targets could increase the country's susceptibility to financial market shocks.

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(2) The increased downside risks to economic growth due to macroeconomic structural weaknesses and a weakening global outlook.

Yup. We're headed into a global recession, folks. Hang on to your hat it's going to be a rough ride.

[mawilson 2,133]

Yup. We're headed into a global recession, folks. Hang on to your hat it's going to be a rough ride.

I expect a mega bailout by the European Central Bank to the tune of a couple of trillion Euros.

If they print enough Euros, they can bail out Greece, Spain, Italy and all the rest.

I'm short EUR/USD just in case

[scandal 951]

I expect a mega bailout by the European Central Bank to the tune of a couple of trillion Euros.

If they print enough Euros, they can bail out Greece, Spain, Italy and all the rest.

I'm short EUR/USD just in case

I expect you're right about the bailout. But I think a global recession is looking unavoidable, there's just no one injecting any demand into this thing.

As to EURUSD, the $ hit a nine month high today before retracing the other way. I figured you for a contrarian not a herd follower

[mawilson 2,133]

I expect you're right about the bailout. But I think a global recession is looking unavoidable, there's just no one injecting any demand into this thing.

As to EURUSD, the $ hit a nine month high today before retracing the other way. I figured you for a contrarian not a herd follower

The herd is too strong. If you're right about a global recession being unavoidable, the dollar will only keep strengthening (being a "safe haven" and all that jazz).

[Gary and Alla 3,694]

The good news for the EU is that they are going to tax airlines for carbon emissions. That should help. Meanwhile, in the US, we lost 212,000 jobs in September so their number 1 tourist has a lot less people that can afford to fly to the EU.

MORE TAX! MORE TAX!

Edited October 5, 2011 by Gary and Alla