Italy Takes Credit Rating Downgrade AND Negative Outlook by S&P

S&P said that it actually affirmed the unsolicited short-term sovereign credit rating at A-2″ in today’s call. The outlook on that long-term rating is negative, however. After looking through the report it appears as though the only good news is the Italy’s current account will be in a surplus of about 1% of GDP this year and 2% of GDP in 2014.

This may seem hard to comprehend for growth (or lack thereof) but S&P points out that this is after a decade of real growth averaging -0.04%. The first quarter of 2013 had an output 8% lower than the last quarter of 2007, and unfortunately that output continues to fall. S&P also went on to say that it has lowered Italy’s GDP growth for 2013 down to -1.9% from -1.4% when it gave a last update in March. Another negative is that the per capita GDP will be approximately $33,000 which is also under 2007 levels.

S&P further went on to say that wages are now misaligned with underlying productivity trends and that is impacting Italy’s ability to compete globally. The report today also suggests that Italy has seen its wages rise more than any other major European nation and the euro.

By the end of 2013 S&P is now forecasting the net government debt that will be at 129% of GDP. Two key issues brought up in this for government revenue, as the suspension of taxes on owner occupied houses and a delayed increase in the value-added tax both are playing a role.

As far as the Outlook, Italy remains negative with at least a one-in-three chance that the rating could be lowered yet again in 2013 or in 2014. This matters because a “BBB-” rating is the cut-off line for investment-grade. Italy could be teetering on junk bond credit ratings very soon.

Investors and savers and workers need to all consider that of the five PIIGS, Italy is far more important than the nations of Portugal, Ireland, Greece, and Spain. As the world’s 11th largest economy, Italy is simply too big to bail out.