September 17, 2012 / 2:17 PM / 5 years ago

TEXT-Fitch affirms Region of Lazio at 'A-', outlook negative

Sept 17 - Fitch Ratings has affirmed the Italian Region of Lazio's Long-Term
foreign and local currency ratings at 'A-' with Negative Outlook, and Short-Term
rating at 'F2'. The rating actions affect about EUR12bn of bonds and loans
outstanding and future direct borrowing.

The affirmation reflects Fitch's expectation that the Region of Lazio will be
able to maintain a positive, albeit shrinking, operating surplus and stabilise
financial debt while reducing the fund balance deficit over the medium term,
amid decreasing tax revenue due to the economic recession and cuts in national
subsidies. The rating could be downgraded over the next 18-24 months if the
operating margin halves from the 5% posted over 2008-2011, thereby weakening the
debt and debt service protection ratios. The rating could also be downgraded if
the sovereign rating is downgraded.

Lazio performed in line with Fitch's expectations in 2011, maintaining the fund
balance deficit at about EUR6bn while the spike of receivables to EUR10bn in
December from EUR8bn at the beginning of the year reflected withholding of cash
by the national government. The government continues to exert pressures on the
region, as it remains under tutorship to balance the health care sector.
Surcharges on PIT and business tax-IRAP funded Lazio's health deficit, which
nonetheless declined towards EUR750m in 2011 from close to EUR1.5bn in 2008/2009
as spending is being curtailed by reduction in hospitals beds and spending
restraints on the purchase of goods and services, such as pharmaceuticals.

Fitch expects Lazio to tap its tax-raising flexibility, which includes the
eventual rise of the PIT and business tax surcharges from 2014, to maintain the
health care sector roughly in balance over the medium term. However, the
curtailment of national subsidies over the 2012-2014 may compress the adjusted
operating balance down towards EUR350m, from the average of EUR700m over the
last four years, which will barely suffice to cover the annual principal
component. Preferential payment of financial debt, a standard practise for
Lazio, will therefore continue to ensure timely servicing of EUR500m of interest
expenses. The high 75% proportion of debt carrying fixed rates protects the
region's budget from interest rate rises.

The new funding system, which envisaged a replacement of subsidies with taxes
from 2013 will remain largely neutral for the regional budget as Fitch expects
the national government to seize extra revenues stemming from the regional
wealthy economy and divert them to the reduction of the national deficit-to-GDP
ratio. Moreover, weak consumption is likely to weigh on Lazio's economy, which
Fitch expects to contract by about 1.5% in 2012 and eventually stagnate in 2013.
Economic sluggishness will negatively impact the employment base and the
unemployment rate could eventually rise to 11% in 2012/2013, up from 9.9% in the
second quarter of 2012. However, Lazio remains a wealthy region with a per
capita GDP about 20% above the EU average.

Salary freezes will largely offset revenue rigidity stemming from the weakness
of the economy. Wages account for about 50% of Lazio's operating expenditure
when the health care units' personnel is included. Spending constraints imposed
by the national government will contribute to reduce Lazio's overall budgetary
deficit, eventually halving it to 5% of total revenues over the 2012-2014
period, down from an average of 10% over the 2008-2011 period. Like all Italian
administrations Lazio will have to run a balanced budget from 2014.

Lower deficits will also be conducive to limiting the stock of bonds and loans
close to EUR12.5bn by 2013/14 while shrinking the fund balance deficit. The
downsizing of capital spending to below EUR1bn from 2012 should help the
recovery of the fund deficit to EUR5bn by 2014, down from the average of EUR6bn
from 2009. Capital spending in 2011 has been inflated by Fitch to incorporate
EUR0.5bn of past health care deficits funded by a loan granted by the national
government and accounted as costs by the region.

Additional information is available at www.fitchratings.com. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.

Applicable criteria, 'Tax-Supported Rating Criteria', dated 14 August 2012 and
'International Local and Regional Governments Rating Criteria', dated 17 August
2012, are available at www.fitchratings.com.

Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
International Local and Regional Governments Rating Criteria - Outside the
United States

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