Is An Italian Downgrade Next?
by Win Thin
Here our thoughts regarding the rumored downgrade of Italy. While we remain negative on the ratings for peripheral euro zone, we don’t think a downgrade of Italy is a sure thing. Its numbers have always been bad, and have in fact stayed remarkably stable during this crisis even as the rest of the periphery blew up. With rating agencies on the warpath, we can’t rule out a downgrade, but the case for a downgrade of Italy isn’t as glaringly obvious as the others in the periphery.
Our sovereign ratings model currently has Italy at A+/A1/A+ vs. actual ratings of A+/Aa2/AA-. Moody’s is most out of line (by two notches) but S&P is on target and Fitch is off by one notch. As a point of reference, the implied ratings for Italy, Ireland, Portugal, and Greece all started out at A+/A1/A+ when we began the model in June 2009. But since then, Italy’s implied rating has remained at A+/A1/A+ even as those for Portugal, Ireland, and Greece have sunk to A-/A3/A-, BBB/Baa2/BBB, and BB/Ba2/BB, respectively. Spain’s implied ratings started off in June 2009 at AA/Aa2/AA but have since fallen to A+/A1/A+. As we noted earlier, the downgrade story will remain in play for the periphery for much of 2011.