S&P cuts Italy's credit rating citing weak economy

AP News
Posted: Dec 05, 2014 3:22 PM

Standard & Poor's on Friday downgraded Italy's credit rating one notch and slashed its forecast for the country's economic growth next year.

The New York-based agency cut its rating on Italy's debt to "BBB-." That's its lowest investment-grade rating and one notch above "junk" status.

S&P said it expects that the Italian economy will emerge from recession early next year. But the agency now predicts Italy's economy will grow only 0.2 percent in 2015, down from its previous forecast of 1.1 percent for the year.

Italy's weak economy and the country's eroding competitiveness are undermining its ability to sustain its public debt, S&P said in a note outlining its reasons for the downgrade.

"Our forecast also reflects our view of Italy's weak domestic fundamentals, including its difficult business environment and competitiveness challenges," the agency said.

Italy's economy has been struggling amid a broad economic slump in Europe, weighed by record-high unemployment and growing government debt. The economy contracted 0.1 percent in the third quarter, bucking a mild European Union trend of growth seen even in economically battered Greece.

Looking further out, S&P predicts Italy's economy will grow between 0.5 percent and 1.2 percent from 2014 through 2017. That's slower than Italian government forecasts ranging from 0.7 percent to 1.9 percent growth in the same period.

One key impediment to growth is Italy's unemployment rate, which is above 12 percent. That's helped constrain private-sector spending and contributed to subdued investment activity — trends S&P anticipates will continue.

Italy's prime minister, Matteo Renzi, is pushing legislation to make it easier to fire workers and reduce employers' incentive to hire temporary workers. The plan, dubbed the Jobs Act, is meant to help encourage business to hire at a time when youth unemployment in Italy skyrocketed to 43.3 percent as of October.

The proposed legislation is opposed by labor unions, some of which have staged protest marches and called for a nationwide strike. Should it become law, S&P believes it could help stem job losses in the near-term and eventually help add jobs.

"Although we think the announced reform measures in a wide range of policy areas will ultimately help strengthen the economic fundamentals and resilience of the Italian economy, these benefits will likely not be felt in the near term," S&P said. "In fact, the persistently weak economic conditions could raise fiscal risks before the growth-enhancing structural reforms take root."