Italian government spreads widen on ratings change

Italian bond spreads widened nearly two basis points against the euro swaps curve, following yesterday's announcement by credit agency Standard & Poor’s that it has revised its ratings outlook on the country from stable to negative. By the end of the day the spread on the 10-year bond had widened to around 1.7bp.

Standard & Poor’s said the lack of structural reform in Italy was the main reason for its placement of the sovereign on negative outlook.

“Complacency about fiscal developments and failure to address budgetary imbalances with lasting structural measures could lead to a lowering of the ratings within one to two years,” said Standard & Poor’s credit analyst Moritz Kraemer. “Conversely, the outlook would be revised to stable if sustainable budgetary improvements were achieved.”

Any likely downgrade could occur between six months and two years, said an swaps analyst at a major European bank. If a downgrade were to occur it would be the first for a sovereign in the Eurozone since the single currency began.

Standard & Poor's analyst Luc Marchand said Italy’s risk management outside of its fiscal policy has been relatively strong in recent times, in particular its securitisation issuance. But Marchand said the securitisation policy is unlikely to sustain the country too many years into the future. “They will run out of assets to securitise,” he said.