DBRS Downgrades Italy, Stripping It Of Its Last "A Rating" And Raising ECB Collateral Haircuts
By Tyler Durden
When previewing the key events of the week, we noted that today Canadian DBRS rating agency is scheduled to review Italy’s credit rating after putting its credit worthiness on negative watch on 5 August. On 5 December, DBRS issued a press release declaring that they would wait for the impact of the Italian referendum result on the continuation of the reform push before making the final decision.
In case of a downgrade, the haircut for a 5y BTP used as collateral for ECB operations, as an example, would rise from 2% to 10%.
Moments ago DBRS did just that when it downgraded italy from A (low) to BBB (high), stripping the sovereign of its final A credit rating.
The rating agency cited “a deterioration in the “Monetary Policy and Financial Stability” and the “Political Environment” sections were the key factors in the downgrade. The Stable trend reflects DBRS’s view that Italy’s challenges are commensurate with the BBB (high) ratings and are balanced by the country’s strong commitment to fiscal consolidation and evidence of some, albeit very modest, economic recovery.”
It also warned that “if weaker political commitment to fiscal consolidation and the reform agenda or a significant downward revision to growth prospects were to materialize, further delaying a steady decline in the public debt-to-GDP ratio, this weakening could lead to a Negative trend.”
The new interim government, although supported to some extent by the same majority as the Renzi government, may have less room to make progress with growth-enhancing measures, as it was formed with the main aim of facilitating parliamentary discussion on the electoral law before political elections scheduled to be held in 2018. Furthermore, the risk of an early election remains, especially after a decision is made by the Constitutional Court on the electoral law, expected in late January 2017. This decision could affect the duration of Prime Minister Gentiloni’s cabinet. Political parties could immediately put more pressure for snap elections in the first half of 2017, using the electoral law produced by the decision of the Court. This pressure would be expected to capitalise on the result obtained in the referendum in December 2016.
However, there is also a lack of clarity over the timing of elections. DBRS considers that the next election is unlikely to be held before Autumn 2017, as the parliamentary discussions on the electoral law are likely to take time. DBRS also considers that the next electoral law is likely to have a higher proportional characteristic, increasing the chances of having a coalition government of mainstream parties and lowering the electoral chances of Euro-sceptic parties. Nevertheless, support for the opposition parties could increase if economic conditions were to not improve, especially for the young and the long-term unemployed.
According to a separate estimate from Rabobank, the haircut on Italian bonds imposed by the ECB would rise from 1.5% to 9%, and lenders would need to post €6.7 billion more in government debt to access the same levels of loans. Cited by the FT, Richard McGuire at …read more
Source: DBRS Downgrades Italy, Stripping It Of Its Last "A Rating" And Raising ECB Collateral Haircuts
