Italy bonds reprieved as S&P downgrade avoided

Italy has escaped a potential downgrade to its credit rating by Standard & Poor’s, handing the country’s bonds a reprieve following a recent sell-off that has pushed borrowing costs sharply higher. 

Following a regular review of Italy’s creditworthiness, S&P on Friday held the rating at BBB, two notches above “junk” status, despite forecasting a leap in Rome’s debt level to 153 per cent of GDP by the end of the year as the government ramps up borrowing to fund its response to the coronavirus crisis. 

The rating agency said that the European Central Bank’s massive asset purchase programmes were “backstopping this additional public borrowing”.

The announcement followed an earlier statement by Moody’s saying Italy’s rating should be “broadly unaffected” by the pandemic because of the temporary nature of the economic shock. Moody’s currently rates Italy one notch above junk. 

S&P retained its negative outlook for Italy’s rating, saying it could decide to downgrade it if borrowing costs rose further. “We could lower the ratings if government debt to GDP fails to shift on to a clearly discernible downward path over the next three years, or if there is a marked deterioration in borrowing conditions that jeopardises the sovereign’s public finance sustainability,” the rating agency said in a statement.

Italy’s bonds have come under increasing pressure in recent weeks as investors worry about a deluge of new debt issuance and the reluctance of other eurozone members to share the financial burden of fighting the crisis. The sell-off continued early on Friday after EU leaders remained deeply divided on the issue of jointly backed bonds at Thursday’s summit, but recovered later in the day with traders saying the European Central Bank had stepped up its buying of Italian debt.

Italy’s 10-year bond yield fell to 1.85 per cent, down from a one-month high of more than 2.2 per cent earlier in the week but still well above the low of 1.2 per cent in late March following the ECB’s announcement of its €750bn emergency bond-buying programme. 

Friday’s announcements by S&P and Moody’s will reassure some investors who were expecting a downgrade, and make it less likely that Italy will be handed a junk rating in the near future.

Italy would see its bonds thrown out of widely followed indices if two of the big three agencies strip it of the investment grade status, forcing some investors to sell its debt. 

“There’s now a better chance that this massive expansion in borrowing can take place without some sort of joint issuance in the eurozone,” said Peter Chatwell, head of multi-asset strategy at Mizuho International.

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