MercoPress. South Atlantic News Agency

Standard & Poor’s ‘yellow card’ for Italy; promise of balanced budget in 2014

Prime Minister Silvio Berlusconi: bottle necks and rigidities will be addressed

Italy’s Treasury said it will “intensify” structural changes in the economy and push ahead with measures to balance the budget by 2014 after Standard & Poor’s said its debt rating is at risk of a downgrade.

“With regard to the economy, the government has initiated and will intensify its reforms; in regard to the budget, a phase of measures are in advanced preparation in order to balance the budget by 2014,” the Treasury said in an e-mailed statement from Rome. It also said the measures will be submitted to the Parliament for approval by July.

Italy had its credit-rating outlook lowered to negative from stable by Standard & Poor’s, which cited the nation’s slowing economic growth and “diminished” prospects for a reduction of government debt, according to an S&P statement on Friday. S&P affirmed Italy’s A+ long-term rating, the fifth-highest, and its top-ranked A-1+ short-term rating.

“What S&P is saying is that Italy’s economy is not growing because it has not undertaken structural reforms, and this lack of growth could make it difficult for the country to meet its commitments in the medium to long-term,” said Nicola Borri, who teaches economics at Rome’s Luis University.

“They’re not saying we’re like Greece and Portugal now, we’re OK for now, but we need to reform or there will be trouble down the line.”

Italy’s “current growth prospects are weak, and the political commitment for productivity-enhancing reforms appears to be faltering,” S&P said. “Potential political gridlock could contribute to fiscal slippage. As a result, we believe Italy’s prospects for reducing its general government debt have diminished.”

The Italian Treasury ruled out “absolutely” the risk of political gridlock highlighted by S&P and said Italy will keep all its economic commitments. It also pointed out that S&P’s views are very different from those expressed by the IMF, OECD the EC.

The Italian economy expanded 0.1% in the first quarter, less than economists had estimated, as gains in exports failed to offset weak domestic demand. The Euro region’s third- biggest economy won’t return to its pre-recession level for at least another two years, and the 2.3 trillion USD economy needs to raise productivity, the OECD said this month in a report.

In Italy, “diminished growth prospects stem from what we consider to be a lack of political commitment to deregulating the labor market and introducing reforms to boost productivity,” S&P said. “We believe measures to reduce the bottlenecks and rigidities in Italy’s economy are especially important in light of Italy’s limited monetary flexibility.”

The negative outlook implies a one-in-three chance that Italy’s ratings could be lowered within the next 24 months.

On May 5, Prime Minister Silvio Berlusconi’s cabinet, aiming to spur growth and productivity in the economy, passed a plan to cut bureaucracy and offer tax breaks for companies that invest in research. Finance Minister Giulio Tremonti, who avoided the kind of stimulus policies that inflated budget deficits in other euro nations, said the plan won’t require any increase in spending.

The government last month cut its forecast for economic growth in 2011 to 1.1% and in 2012 to 1.3% from previous estimates of 1.3% and 2% respectively.