March 26, 2020 / 6:11 PM / 4 days ago

UPDATE 1-Italy's debt-to-GDP could easily top 145% - Scope ratings

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By Marc Jones

LONDON, March 26 (Reuters) - The crippling economic costs of the coronavirus could easily push Italy’s debt-to-GDP ratio over 145%, credit rating agency Scope warned on Thursday, as worries about a possible rating downgrade of Europe’s fourth largest economy continued.

Italy already has one of largest debt piles of any major economy and Germany-based Scope said it now expected a budget deficit of more than 6% of GDP this year.

“Italy’s debt ratio could easily breach a 145% of GDP threshold within the next year,” it said in a report.

“The much increased 2020 deficit accounts for an increase in Italy’s cyclical deficit alongside 50 billion euros in ‘shock therapy’ fiscal support actions that alone raise the deficit by over 2% of GDP.”

Italy has had more death from the coronavirus outbreak than any other country and, with the costs mounting, concerns about the country’s credit rating are rumbling.

S&P Global, which along with Fitch, has a ‘negative outlook’ on its BBB rating on Italy, estimated on Thursday that the overall euro zone economy could suffer a 10% recession this year if current virus lockdowns lasted four months.

Investment bank Morgan Stanley too flagged that Italy’s rating could be vulnerable if rating agencies decided action was required due to the deteriorating fundamentals.

“Should they (rating firms) turn more cautious, Italy would seem more at risk of downgrades in the near-term, with Fitch and S&P already having the rating outlook at negative for a long time,” the bank said in a report also published on Thursday.

S&P is next due to review Italy’s rating on April 24, followed by Moody’s and number four rating agency DBRS on May 8, and then Fitch on July 10.

A downgrade would take its rating down to BBB-, which is the lowest level of the investment grade bracket. Investment grade status tends to lower a country’s borrowing costs because some major pension funds and other large investors only buy bonds rated investment grade.

“In today’s exceptional circumstances, a ‘whatever it takes’ approach is what is required on the part of national governments and central banks to address the pandemic and its economic consequences,” Scope’s head of head of public finance Giacomo Barisone said.

“But there is no escaping the observation that there are immediate and later-day credit implications depending on the scale of the decline in the economy and in debt sustainability.”

Reporting by Marc Jones; Editing by Abhinav Ramnarayan and Alex Richardson

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