Italy - EU: there is no clear short-term solution to the financial impasse

On Friday, Moody's announced that it had lowered Italy's credit rating to Baa3 (from Baa2), moving to a neutral perspective. A press release from Moody's shows that the downgrade had two driving factors: a significant weakening of Italy's fiscal power and negative implications for medium-term growth due to the breakdown of structural economic and fiscal reform plans.

According to Moody's, the planned fiscal stance of the Italian government will stabilize the debt-to-GDP ratio at 130%, rather than decline in the coming years, which will make Italy vulnerable to external shocks. Regarding growth, Moody's believes that the plans of the Italian government could limit the short-term impact on GDP.

On Friday, S & P will publish an update of the sovereign rating of Italy, which is currently at the BBB level with a neutral outlook. As expected, the S & P will change its outlook to negative.

The downgrade does not seem to have affected the Italian government's approach to negotiations with the EU.

The tensions between the EU Commission and the Italian government, following the submission of the Italian draft budget, are developing rapidly.

It is expected that the commission will appeal to the Government of Italy with a request to submit a revised draft. By not allowing a significant acceleration of market pressure on Italian bonds, the government is likely to accept only limited amendments to the current text, perhaps in the direction of the obligation to resume structural adjustment in 2020, rather than in 2022.

With the imminent European elections of 2019, the risk is that the Italian government will maintain a complex attitude towards Europe over the next few months, not taking the attitude to the extreme. This is an environment that will tend to keep volatility in the Italian government bond market high.