On Friday, after the market close, rating agency S&P left Italy’s rating unchanged at BBB with a negative outlook. So let me think, Italy was on a negative outlook, the world has locked down due to the coronavirus, Italy has committed to spending even more money that it doesn’t have, and the rating is unchanged and still on negative outlook? 

So what did the agency give as reasons for the unchanged rating?

They said that Italy is an open and diversified economy with low levels of private debt. Well yes, but that hasn’t changed in any way during this crisis, so how can this be a counterpoint to the increase in government debt to an estimated 153% of GDP? Well I’ll tell you how – because the ECB are going to buy it. The review hints on numerous occasions that the ECB is Italy’s “backstop” to be able to finance its debt pile at real interest rates of “around 0%”.

They go on to say that Italy has private debt levels lower than Germany at 110% vs 114%. Is that a good thing? Italians have a high propensity to save, so is this not a symptom of low investment, not a counter balance to the high levels of government debt? I wonder if they are going to give the Germans a ticking off for their elevated levels of private debt relative to Italy when they do their next review?

Where did they admit they could be wrong?

If the debt path fails to improve over the next three years then S&P noted that they could lower the rating. They assume an end-of-2020 debt to GDP of 153% and deficit of 6.3%, where on Friday the Italian government produced estimates of 155% and 10.4%, so they are already behind the curve on the day they have released the review. 

What about Greece?

S&P also reviewed Greece on Friday, downgrading the outlook to stable from positive due to the fallout from the coronavirus pandemic. Does it seem to anyone else that there is some inconsistency here? Or is it just the fact that Greece is already junk and Italy is sensitively close to the sub-investment grade rating? 

I will let you decide for yourself if there is a smell of Italian sardines here, but not to worry, the ECB is at the dining table. 

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