November 13, 2018 / 3:30 PM / 6 months ago

UPDATE 1-Portugal debt chief says hard to see Italian ratings downgrade

(Updates with more comment, background)

By Abhinav Ramnarayan

BRUSSELS, Nov 13 (Reuters) - Italy’s credit rating is unlikely to be downgraded anytime soon because the country still has a primary surplus and is less exposed to external shocks than other countries, the head of Portugal’s debt agency said on Tuesday.

“I find it difficult to see Italy downgraded in the near future,” Christina Casalinho, chief executive officer of the Portuguese government debt agency, said at a conference in Brussels.

Italy has been at the centre of volatility of euro zone bond markets this year after a new government proposed plans for fiscal expansion that sparked a jump in Italian bond yields, conflict with the European Union and concern about downgrades to Italy’s debt ratings.

In October, ratings agency Moody’s cut Italy’s sovereign debt rating to one notch above junk because of concerns over the government’s plans. S&P last month left Italy’s rating unchanged at BBB - two notches above junk - but downgraded its ratings outlook to negative.

“If you look at how exposed Italy is from an external perspective, it is much less exposed to external shocks than other countries,” Casalinho said. “So you have (to take) a balanced view.”

Portugal’s bond market has been relatively insulated from the turmoil in Italian markets this year, something Casalinho put down to a more diverse investor base.

Portugal’s credit rating returned to investment grade with S&P last year, exposing Portuguese government bonds to a much broader pool of potential investors that can only invest in top-rated bonds.

“We haven’t suffered so much from contagion as we have in the past because these days investors are much more able to differentiate between countries and assess fundamentals,” Casalinho told Reuters on the sidelines of the conference.

“Also these days Portugal enjoys an investment-grade rating, which is a plus.”

Speaking about Britain’s exit from the European Union, Casalinho said Brexit would raise funding costs for European governments and taxpayers will take the hit.

“Brexit will make sovereign funding (in Europe) more expensive,” she said. “Ultimately the cost will be to the issuers, and therefore to the taxpayers.”

Casalinho said that she could not see banks setting up significant operations in Europe after Brexit because it would be “a costly process”.

She did not explain why Brexit would be expected to raise government borrowing costs.

However, costs incurred by banks because of Brexit would likely be passed on to clients such as governments.

Reuters reported in September that as few as 630 UK-based finance jobs had already been shifted or created overseas with just six months to go before Brexit. France has said it expects London to remain a major financial centre. (Reporting by Abhinav Ramnarayan; writing by Dhara Ranasinghe; editing by Larry King)

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