Italy economy crisis: Bond market facing critical ’junk’ rating

Europe’s hardest hit country by the coronavirus crisis will be reviewed by S&P Global Ratings on Friday. Its current ranking – BBB – is just two notches above “junk”, with a negative outlook. A downgrade would likely mean a further rating cut in the coming months.

The New York-based bank said Italy’s rating is at risk from the economic shock sparked by the coronavirus pandemic, which has killed 25,085 people.

Goldman Sachs said the yield premium for 10-year Italian bonds versus German Government bonds of the same maturity is likely to increase from around 244 to 280 basis points at present.

If the nation was given a junk rating it could bring about a major investor drain.

This is because an investment-grade rating is needed for many portfolio plans.

Italy’s passive holdings of government bonds are around the €100 billion mark, Goldman estimates.

Barclays sees outflows of up to €200 billion if the credit rating is lowered below “investment grade”.

George Cole and Sara Grut penned a memo to customers about what to expect from the review.

They said the EU’s response to the COVID-19 crisis will play a crucial role in the outcome.

The strategists at the bank wrote: “Italy’s proximity to the lower limit of the investment grade indicates an additional market risk in upcoming decisions.

“The response of EU policies is probably crucial for the next step.”

All eyes will be on the summit of EU leaders on Thursday.

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Participants will discuss over video link how to use a joint long-term budget to restart economic growth.

On Wednesday, a bloc official said it may take member states until the summer or even longer to agree on how exactly to finance aid to help economies recover from the outbreak.

The planned summit is expected to produce only a broad agreement to use the EU’s 2021-27 joint budget to help kick-start growth.

The bloc’s 27 national leaders should also rubber-stamp €500 billion of rescue measures effective from June.

An unnamed EU official, who is involved in preparing this week’s leaders’ summit, said they remained hopeful about a positive outcome.

“My hope is to make progress in June, July,” they said.

But they said a final deal might take even longer, adding: “Political lines are moving … but it will take time.”

Italy, France and Spain have led the chorus calling for mutualised debt.

But wealthy, fiscally conservative countries like Germany, Austria, Denmark, Sweden, Finland and the Netherlands have rejected calls to sell joint “coronabonds” to raise funds to restart growth.

Additional reporting by Monika Pallenberg.

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