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Political Uncertainty and Weak Growth Forces Fitch to Cut Italy Outlook

Political Uncertainty and Weak Growth Forces Fitch to Cut Italy Outlook
The euro zone’s third largest economy is facing a problem. And now it has been recognized by ratings agency Fitch.
The Italian economy has been stumbling due to the uncertain outcome of a planned referendum, weak growth and high debt. And these are the reasons that Fitch gave when it cut its outlook for Italy on Friday saying that these factors posed risks to its economy.
The outcome of the polls for vote on constitutional reform is considered to be too close to call. It is this voting that could decide Prime Minister Matteo Renzi’s future and the close call has in fact increased the political uncertainty ahead of the vote, Fitch said. This was one of the primary reasons that the ratings agency felt could make the economy stutter in the  near future. Fitch said that the outcome of the vote was uncertain and it was nearly impossible to decide in the future of the economic policies of the country.
While Fitch noted that Renzi has indicated he could resign in the event of a "no" vote, which it said had increased the downside risks significantly even as the agency unchanged Italy's BBB+ rating.

"Even in the event of a 'yes' vote, Italy would face elections by May 2018, with populist and Euroskeptic parties currently performing well in opinion polls," Fitch said.
Fitch said that the present government has continued a "pattern of slippage against fiscal targets since 2013" and cited some of the potentially voter-pleasing budget measures that were taken by Renzi and unveiled last week. The measures included Rome's latest upward revision to the deficit target which went against the country’s economy as far as ratings were concerned.
The European Commission rules demand that governments of all member countries should strive to make progress every year towards balancing their books or achieving a surplus. However the measures by the Italian government is in contradiction to that requirement and hence the country could be pitted against the EU on  this issue.
Public debt, which as a proportion of GDP has risen to be the euro zone's second-largest after Greece's and the Commission says Rome needs to curb the deficit to rein in public debt. Fitch forecast this would be would peak at 133.3 percent of GDP in 2017.
Fitch said that while the outcome of two alternative rescue plans for Banca Monte dei Paschi di Siena is uncertain, another risk to the economy is posed by Italy's banking sector and its 200 billion euros ($217.6 billion) of bad loans.
If these were to fail,, European rules on state aid to banks would limit the options available. Fitch said, "which could have negative implications for the broader banking sector".
Although it revised down its forecast for GDP growth to 0.8 percent in 2016, in line with the government's recently trimmed forecast, Fitch expects economic growth, which ground to a halt in the second quarter, to start again in the third.
"Weak growth makes it harder to reduce government debt, bank NPLs (nonperforming loans) and unemployment, and risks increasing support for populist political parties," Fitch said.

Christopher J. Mitchell

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