June 26, 2018 / 2:25 PM / 8 months ago

Fitch says fiscal expansion the main risk to Italian ratings

LONDON, June 26 (Reuters) - Expansionary fiscal measures that could weaken Italy’s debt position is the main risk to the country’s credit rating, according to a report from Fitch Ratings.

Italy’s new anti-establishment coalition plans deep tax cuts and higher welfare spending — policies that are likely to clash with the European Union’s rules for fiscal discipline.

Fitch said its BBB rating for Italy with a stable outlook already incorporates a degree of political risk.

“In our view, the main risk is expansionary fiscal measures weakening debt dynamics,” Fitch said in a note, dated June 25.

“The degree of additional loosening will become clearer over the next few months as the 2019 budget process progresses.”

The rating agency is next scheduled to review Italy on August 31.

Fitch said it sees an Italian exit from the euro as unlikely, adding that it does not anticipate a referendum on euro or European Union membership or for Italy to push through measures that effectively create a parallel currency, at least in the near term.

“Nevertheless, the presence of such downside risks could lead to persistently higher sovereign spreads even in the absence of any materialisation of the risk,” Fitch said.

Last week, the appointment of two eurosceptics to key parliamentary committees stoked concerns about the new government’s commitment to the euro. (Reporting by Dhara Ranasinghe, Editing by Abhinav Ramnarayan)

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