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Moody's places Italy's ratings on review for downgrade

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Moody's places Italy's ratings on review for downgrade

Moody's placed Italy's sovereign credit rating on review for a possible downgrade amid concerns that the new government's plans could weaken the country's fiscal strength and reverse past reforms.

The rating agency is reviewing Italy's Baa2 long-term issuer and senior unsecured bond ratings, along with the commercial paper and other short-term ratings of Prime-2/(P) Prime-2, respectively.

This action comes as Italian premier-designate Giuseppe Conte continues to hold talks over the formation of the new government.

Moody's said it will assess the impact of the fiscal and economic policies of the new government on Italy's credit profile, particularly on deficit and debt trajectories in the years ahead. It noted that the coalition deal reached by populist parties Five Star Movement and League includes costly revenue and spending measures, without clear proposals regarding their funding.

The rating agency said it will specifically examine the incoming government's proposal on taxes and a basic income for the poor, warning that higher budget deficits would slow down efforts to lower Italy's high public debt ratio of over 130% of GDP.

"While Moody's notes that some of the coalition parties' original proposals have been modified in the final coalition agreement, they would still lead to a weaker, not a stronger, fiscal position going forward," the debt watcher said. "So far, Moody's has assumed a gradual deficit reduction over the coming years, which in turn would allow for a very gradual decline in the public debt ratio."

Moody's will also review whether the incoming government plans to continue structural reforms aimed at boosting growth, or negate earlier programs such as the 2011 pension reforms, along with other economic measures that may affect Italy's growth potential over the coming years.

On the upside, Moody's noted that the parties forming the new government seem to have acknowledged the need to maintain small budget deficits, and that their coalition deal excludes previous proposals that raised questions on Italy's commitment to its EU membership.

For now, there is a "very low risk of a severe deterioration in Italy's credit profile," according to Moody's. It also said that the Italian economy "maintains significant underlying strengths" as it continues to recover from a prolonged period of low growth.