17 May 2013

Moody's: Italy's stronger budgetary performance still justifies higher rating than Spain

Italy's structurally stronger public finances are one of the key reasons for maintaining Italy's Baa2 sovereign rating one notch above Spain's Baa3 rating. In the report, the rating agency analyses the key economic and fiscal challenges of both countries.

Moody's explains that a key reason for Italy's currently higher rating is the fact that its stronger fiscal metrics allow it more time to address its structural impediments to growth. Both headline and structural budget deficits are significantly smaller in Italy than in Spain and its public debt ratio is expected to stabilise earlier. Importantly, in Moody's view, Italy has managed to maintain relatively low budget deficits throughout a prolonged period of low economic growth. In contrast, Spain's public finances experienced one of the most pronounced deteriorations among developed economies during the crisis. In addition, its public finances have been negatively impacted by the weakness of the regional governments' finances and the need to support parts of its domestic banking system. Moody's expects Italy's public debt ratio to peak in 2014, while the inflexion point in Spain is only expected in 2016.

At the same time, Moody's believes that Spain has advanced further in correcting the loss in its external competitiveness and -- given the government's absolute majority in parliament -- the Spanish authorities should also be able to implement further structural reforms more easily. Consequently, Moody's central scenario anticipates a somewhat stronger growth recovery over the medium term in Spain than in Italy. On the other hand, there is greater uncertainty surrounding short-term growth projections of the Spanish economy than there is for Italy given that Spain's growth outlook is complicated by negative feedback loops between deleveraging needs in the private sector, weak domestic demand and a deteriorating labour market.

Full report (Moody’s registration required)

© Moody's