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Moody's signals prolonged downgrade review for Italy's ratings

Moody's said it was keeping Italy's sovereign credit rating under review for a possible downgrade due to the escalating political crisis following the collapse of two populist parties' efforts to form a coalition government.

The rating agency said the downgrade review continues due to the increased likelihood of fresh elections in September and the expected failure of new Italian Prime Minister-designate Carlo Cottarelli to form a government.

It said a Cottarelli-led government is unlikely to obtain parliamentary support since both the anti-establishment Five Star Movement and League parties, which have voiced their preference for another election, enjoy a majority in both houses.

"The political developments of the last few days have no bearing on our recent decision to place Italy's ratings under review for downgrade. The key areas of focus for the review also remain unchanged," said Moody's, which expects the populist parties to still garner the most votes in a new election.

"We will conclude the review when we will have better visibility on the policy direction of the country, which means that the time frame for the review may exceed the typical period of up to three months," it also said.

Moody's placed Italy's Baa2 long-term issuer and senior unsecured bond ratings on review for downgrade on May 25 amid concerns that the policies of the populist coalition government could weaken the country's fiscal strength and reverse past reforms.

"Italy's sovereign rating would likely be downgraded if we were to conclude that whoever emerges as the next government will pursue fiscal policies that will be insufficient to place the public debt ratio on a sustainable, downward trajectory in the coming years," the debt watcher said in its latest commentary.

Failure of the next government to present a credible reform agenda aimed at boosting sustainable growth prospects would also negatively affect Italy's ratings, according to Moody's.