Dagong downgrades Italy's credit ratings

08:50, July 12, 2011      

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The Chinese rating agency Dagong Global Credit Rating Co Ltd put Italy on its "negative" watch list in a report released on Monday.

Dagong initially put Italy's sovereign credit ratings (SCR) for local and foreign currencies at A- with a negative outlook in June 2010.

This week's change was made because of Italy's increasing dependence on the European bond market, and the fact that the trend of financing costs will directly affect the country's solvency.

The report attributed the long-term structural problems that impede economic growth to weak governance.

Italy's GDP growth will remain at a low level, projected by Dagong at 0.9 percent and 0.8 percent in the next two years, slower than the average eurozone level.

Although the assets of Italian financial institutions that are exposed to the risks of Greece, Ireland and Portugal are small, low profitability, increasing number of non-performing loans and huge demand for financing have led to a weak foundation for Italy's financial system, the report said.

It is difficult for the Italian government to completely fulfill its plan of cutting national deficit to below 3 percent in 2012, but the growth of government debt will slow due to a gradually reduced fiscal deficit.

Dagong believes Italy's macroeconomic fundamentals and financial position support the country's current credit rating.

But considering the upcoming deadlines for Italy's heavy debt burden, equivalent to 119 percent of GDP, and great uncertainties affecting the overall cost of financing in the eurozone, it will pay close attention to the trend of Italian sovereign debt financing.

"Once it is confirmed that the government's financing costs will continue to rise, the necessary deficit cuts won't be met and the size of debts will continue to surge, Dagong will downgrade accordingly,"said Lu Sinan, a senior analyst with the agency.

The agency maintained its SCR for Luxembourg at the highest level, AAA, and for Ukraine at B.

Dagong has rated 67 countries and regions, 26 in Europe, 23 in Asia and Oceania, 10 in the Americas and eight in Africa. The agency has released follow-up ratings on 16 countries, with seven showing changes.

The agency's ratings differ significantly from the three major rating agencies in the US: Moody's Investors Service Inc, Fitch Inc and Standard &Poor's Financial Services LLC.

Dagong gave higher ratings to 11 countries, mostly emerging economies, while 23 countries, mostly from Europe and North America, were rated lower by Dagong than by the US agencies.

Dagong lowered the SCR ratings of the United States from AA to A+ after the US Federal Reserve Board announced its $600 billion quantitative easing plan, known as QE2, in November 2010.

Source:China Daily
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