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S&P gives respite to Italy with surprise upgrade to rating outlook

10/23/2020 | 04:53pm EST

Oct 23 (Reuters) - Standard and Poor's on Friday revised Italy's sovereign outlook to stable from negative, offering some unexpected good news for the euro zone's third largest economy, and affirmed its long- and short-term credit rating at "BBB/A-2".

The ratings agency said https://bit.ly/3mbPUKMItaly's outlook balances the negative consequences of the coronavirus pandemic on public finances against the extraordinary policy response by the European Central Bank.

Despite surging debt and a deep recession, Italy's borrowing costs are at record lows, thanks to the ECB's huge bond-buying program aimed at supporting the euro zone economy.

S&P said the ECB support, together with the European Union's Recovery Fund which is set to provide Italy with up to 12.5% of gross domestic product in grants and loans conditioned on pro-growth reforms, offered the country valuable breathing space.

"In our view, despite macroeconomic uncertainties, these steps provide Italian authorities an opportunity to restart economic growth and to reverse the deterioration of its budgetary performance," the agency said.

However, S&P said it anticipates Italy's GDP will not return to 2019 levels until 2023 due to the COVID-19 impact on the economy.

Italian Economy Minister Roberto Gualtieri welcomed the agency's move, saying it was "an encouragement to continue on a path that safeguards our economy and at the same time guarantees a strong prospect of relaunching growth."

The government forecasts the economy will shrink by 9% this year. The European Commission, the International Monetary Fund and most independent bodies expect a double digit contraction.

Italy's public debt, proportionally the second highest in the euro zone after that of Greece, is targeted to jump from 135% in 2019 to 158% this year, its highest level since the World War II.

Italian gross domestic product fell by 13% in the second quarter from the previous three months. A partial rebound is penciled in for the third quarter, but the recovery risks immediately petering out due to the resurgence of coronavirus infections which had declined sharply over the summer.

Friday saw 19,143 new cases of the virus in Italy, the highest daily tally since the country's outbreak came to light in late February.

Several Italian regions, from Lombardy in the north to Campania in the south, have imposed nighttime curfews, and on Friday the governor of Campania called for a new national lockdown. (Editing by Maju Samuel)

© Reuters 2020
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