The stalemate outcome of the Italian election has, according to credit ratings agency Moody’s, raised the possibility for long term political uncertainty in the country which will put Italy’s sovereign credit rating at risk of a new downgrade.
The agency believes that the hung parliament is credit negative as it will lead to a new round of voting in the near future which could end with a similar outcome.
“We would consider downgrading Italy’s government debt rating in the event of additional material deterioration in the country’s economic prospects or difficulties in implementing reform,” Moody’s said. “Deterioration in funding conditions as a result of new, substantial domestic economic and financial shocks from the Euro area debt crisis would also place downward pressure on Italy’s rating.”
Currently Italy’s credit rating is Baa2 with a negative outlook.
Meanwhile the country’s latest bond sale went smoothly alleviating some of the concerns and cheering economists. However some traders believe that the bonds were bought either by local Italian Banks or the European Central Bank in a bid to ease the panic that had threatened to ignite the region following yesterday’s election result.
Nick Spiro of Spiro Sovereign Strategy said the sale had gone “relatively smoothly”, but warned:
“The higher yields show that Italian sovereign debt is now caught in a tug-of-war between the reassurance provided by the ECB’s fiscal backstop and the confusion and instability in Italian politics. While there’s still none of the panic of November 2011 or July 2012, sentiment towards Italy has deteriorated markedly since Sunday’s inconclusive parliamentary election.”
The Euro has recovered some of its losses due to the bond sale but is expected to remain volatile for the near term.
Current Euro exchange rates
As of 11:30 am
The Euro to Pound Sterling exchange rate is currently trading in the region of 0.8645
The Euro to US Dollar exchange rate is currently trading in the region of 1.3090
The Euro to Australian Dollar exchange rate is currently trading in the region of 1.2849
The Euro to New Zealand Dollar exchange rate is currently trading in the region of 1.5901