• We are lowering our unsolicited long-term rating on Italy by two notches to 'BBB+' from 'A' and the short-term rating to 'A-2' from 'A-1'.
  • The downgrade reflects what we view as Italy's increasing vulnerabilities to external financing risks and the negative implications these could have for economic growth and hence public finances. We believe the external financing risks are exacerbated by deepening political, financial, and monetary problems within the eurozone.
  • The outlook on the long-term rating is negative.

Rating Action

On Jan. 13, 2012, Standard & Poor's Ratings Services lowered its unsolicited 
long-term sovereign credit ratings on the Republic of Italy to 'BBB+' from 
'A'. At the same time, we lowered the unsolicited short-term sovereign credit 
rating to 'A-2' from 'A-1'. We also removed the ratings from CreditWatch with 
negative implications, where they were placed on Dec. 5, 2011. The outlook on 
the long-term rating is negative. 

Our transfer and convertibility (T&C) assessment for Italy, as for all 
European Economic and Monetary Union (eurozone) members, is 'AAA', reflecting 
Standard & Poor's view that the likelihood of the European Central Bank 
restricting non-sovereign access to foreign currency needed for debt service 
is extremely low. This reflects the full and open access to foreign currency 
that holders of euro currently enjoy and which we expect to remain the case in 
the foreseeable future.


The downgrade reflects what we see as Italy's increasing vulnerabilities to 
external financing risks, given the high absolute amount of external debt. It 
is our view that deepening political, financial, and monetary problems within 
the eurozone are exacerbating the external funding constraints on the Italian 
public and private sectors. 

The downgrade of Italy's ratings reflects our view that the country's external 
financing costs have risen markedly and may remain elevated for an extended 
period of time amid a reduction in cross-border financing of Italian banks and 
the government. We expect that a difficult external financing environment will 
have negative implications for growth performance and hence public finances. 
Looking at BIS data, we note a marked and sustained decline in foreign banks' 
claims on Italian borrowers; this represents a risk to the sustainability of 
Italy's balance of payments, in our view, as it could reduce Italian 
borrowers' capacity to roll over their debt at low interest rates acceptable 
to the borrowers. Consequently we have lowered our external liquidity score 
for Italy (one of the five key factors in our published sovereign ratings 

The lower external score also reflects our view of Italy's substantial 
exposure to short-term external liabilities. Our calculations indicate that 
the ratio of total short-term external debt by remaining maturity exceeds 100% 
of current account receipts. We view current account receipts as an 
appropriate measure of an economy's foreign currency generating capacity. In 
our view, higher interest payments to non-resident creditors in turn will 
require increased domestic savings or lower investment in order to stabilize 
Italy's external debt net of liquid assets, which we estimate at 240% of 
current account receipts at Dec. 31, 2011. 

During 2012 and 2013, we expect the Italian Treasury will likely either pay 
historically high yields at longer maturities or issue debt at lower 
maturities to take advantage of the recent steepening of the yield curve. Over 
time, the latter option would, in our opinion, diminish one of Italy's 
important credit strengths: the relatively long average maturity of its debt 
stock of over seven years, a phenomenon that slows the impact of rising yields 
on the Italian government's budgetary performance.  

The outcomes from the EU summit on Dec. 9, 2011, and subsequent statements 
from policymakers lead us to believe that the agreement reached has not 
produced a breakthrough of sufficient size and scope to fully address the 
eurozone's financial problems. In our opinion, the political agreement does 
not supply sufficient additional resources or operational flexibility to 
bolster European rescue operations, or extend enough support for those 
eurozone sovereigns subjected to heightened market pressures. 

We also believe that the agreement is predicated on only a partial recognition 
of the source of the crisis: that the current financial turmoil stems 
primarily from fiscal profligacy at the periphery of the eurozone. In our 
view, however, the financial problems facing the eurozone are as much a 
consequence of rising external imbalances and divergences in competitiveness 
between the eurozone's core and the so-called "periphery". As such, we believe 
that a reform process based on a pillar of fiscal austerity alone risks 
becoming self-defeating, as domestic demand falls in line with consumers' 
rising concerns about job security and disposable incomes, eroding national 
tax revenues. 

In our view, the effectiveness, stability, and predictability of European 
policymaking and political institutions (with which Italy is closely 
integrated) have not been as strong as we believe are called for by the 
severity of a broadening and deepening financial crisis in the eurozone. 
Nevertheless, we have not changed our political risk score for Italy (one of 
the five key factors in our published sovereign ratings criteria). We believe 
that the weakening policy environment at European level is to a certain degree 
offset by a stronger domestic Italian capacity to formulate and implement 
crisis-mitigating economic policies. This reflects our view of the improved 
policy environment under the recently inaugurated technocratic government 
headed by Mario Monti, and our expectation that extensive growth-enhancing 
measures will be implemented during the first half of 2012. 

We believe that plans to deregulate the labor market, including closed 
professions, could help to restore Italian competitiveness, potentially 
enabling Italy to operate steady current account surpluses in a shift that 
could strengthen Italy's creditworthiness. Nevertheless, we expect that there 
could be opposition to some of the current government's ambitious reforms. 
This, we believe, increases the uncertainty surrounding the outlook for growth 
and hence public finances, in the context of a more challenging funding 
environment for Italian banks and the Italian government.

Italy's ratings are also constrained by what we see as the country's very high 
public sector debt and weak economic growth potential. The ratings are 
supported by our view of Italy's wealthy and diversified economy, expected 
primary fiscal surpluses, and sizable private sector savings. 


The outlook on the long-term rating on Italy is negative, indicating that we 
believe there is at least a one-in-three chance that the rating will be 
lowered again in 2012 or 2013. According to our criteria, we could lower the 
ratings if a weaker-than-expected macroeconomic environment and deflationary 
pressures: reduce Italy's per capita GDP; result in Italy's net general 
government debt ratio continuing its upward trajectory; or lead to what we 
would consider a prolonged worsening of financing conditions. We could also 
lower the ratings if we see that the technocratic administration fails to 
implement structural reform measures that we believe are necessary to boost 
growth potential, whether due to opposition from special interest groups and 
other incumbents or if the new government's term is cut short before its 
mandate is fulfilled.  

Conversely, we expect that the ratings could stabilize at the current level if 
structural reforms are fully implemented and shift the Italian economy to a 
higher level of growth, or if we see that other measures--such as significant 
asset sales and privatizations--are taken to substantially reduce the public 
sector debt burden. 

Related Criteria And Research

All articles listed below are available on RatingsDirect on the Global Credit 

Related Criteria
Related Research

Ratings List

Italy (Republic of) (Unsolicited Ratings) 
                              To                     From 
Sovereign credit rating       BBB+/Negative/A-2      A/Watch Neg/A-1


Standard & Poor's will hold a teleconference on Saturday Jan. 14, 2012 at 3:00 
PM UK time. The teleconference can be accessed live or via replay and by phone 
or audio internet streaming

The call will begin promptly at 3:00 p.m. 

Passcode: 2705831 
For security reasons, the passcode will be required to join the call. 

Country        Toll Numbers            Freephone/Toll Free Number
AUSTRIA        43-1-92-80-003          0800-677-861 
BELGIUM        32-1-150-0312           0800-4-9471 
DENMARK        45-7014-0239            8088-2100 
ESTONIA                                800-011-1121       
FINLAND        106-33-149              0800-1-12771 
FRANCE         33-1-70-75-25-35        080-563-9909 
GERMANY        49-69-2222-3198         0800-101-6627 
GREECE         30-80-1-100-0674        00800-12-6609 
IRELAND        353-1-247-5274          1800-992-870 
ITALY          39-02-3601-0953         800-985-849 
LUXEMBOURG     352-27-000-1351         8002-9058 
NETHERLANDS    31-20-718-8530          0800-023-4392 
PORTUGAL                               8008-12439 
SLOVAK REPUBLIC 421-2-322-422-16           
SPAIN          34-91-414-40-78         800-098-194 
UNITED KINGDOM 44-20-7950-6551         0800-279-3590 
USA            1-210-795-1143          866-297-1588 

Call notes: This call is to be recorded for Instant Replay purposes
UK TOLL #: +44-20-7108-6279
UK TOLL FREE #: 0800-376-9027

The instant replay will start at: Jan. 14, 2012 5:30pm UKT
The instant replay will end at: Feb-14-2012 11:59pm UKT

Passcode for replay: 7498
Restrictions may exist when accessing freephone/toll free numbers using a 
mobile telephone. 

To join the event:
URL: https://e-meetings.verizonbusiness.com
Conference number: 1297498
Passcode: 2705831 

To access the Audio Replay of this call, all parties can:
1. Go to the URL listed above.
2. Choose Audio Streaming under Join Events.
3. Enter the conference number and passcode. (Note that if this is a recurring 
event, multiple dates may be listed.)
Replays are available for 30 days after the live event. 

This unsolicited rating(s) was initiated by Standard & Poor's. It may be based 
solely on publicly available information and may or may not involve the 
participation of the issuer. Standard & Poor's has used information from 
sources believed to be reliable based on standards established in our Credit 
Ratings Information and Data Policy but does not guarantee the accuracy, 
adequacy, or completeness of any information used.
Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.  Alternatively, call one of the following Standard & Poor's numbers: 
Client Support Europe (44) 20-7176-7176; London Press Office (44) 
20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm 
(46) 8-440-5914; or Moscow 7 (495) 783-4009.
Primary Credit Analysts:Frank Gill, London (44) 20-7176-7129;
Moritz Kraemer, Frankfurt (49) 69-33-99-9249;
Additional Contact:Sovereign Ratings;

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