(Fixes DBS to DBRS throughout.)
By Gavin Jones
ROME Jan 13 Canadian rating agency DBRS on
Friday cut Italy's sovereign credit rating to BBB (high) from A
(low), a move that could raise borrowing costs for struggling
DBRS, previously the only major agency with a rating in the
A band for Italy, said its decision reflected uncertainty over
the country's ability to pass reforms, continuing weakness in
the banking system, and fragile growth.
It attached a stable trend to its new BBB (high) rating.
The downgrade will mean Italy's banks will have to pay more
to borrow money from the European Central Bank when they use the
country's sovereign bonds as collateral. It may also make
Italian debt less attractive for foreign buyers.
Of the four agencies used by the ECB to determine collateral
requirements, DBRS was the only one that gave Italy an A-band
rating. This allowed its beleaguered lenders to continue to
receive cheap funding.
Standard & Poor's rates Italy BBB-, Moody's rates it BBB+
and Fitch rates it Baa2.
An Italian Treasury source, who asked not to be named,
played down the repercussions of DBRS's move, saying it may have
some impact on the yields of short-term debt, but "will have no
significant effect on our debt servicing costs."
Italy's public debt, at around 133 percent of national
output, is the highest in the euro zone after Greece's.
DBRS put Italy's rating under review with negative
implications in August, citing political uncertainty around a
referendum held in December, pressure on banks, economic
weakness and a less stable external environment.
The referendum on constitutional changes brought a stinging
defeat for then-prime minister Matteo Renzi, prompting him to
step down. He was replaced by former foreign minister Paolo
After the vote, DBRS said the outcome was "credit negative",
but since then Gentiloni has set aside 20 billion euros ($21.26
billion) to support banks in difficulty. About a third will be
used to try to save Monte Dei Paschi di Siena, the country's
fourth-largest bank, which desperately needs fresh capital.
"The new interim government may have less room to pass
additional measures, limiting the upside for economic
prospects," DBRS said in its statement on Friday.
"Moreover, despite recent plans for banking support, the
level of non-performing loans (NPLs) remains very high,
affecting the banking sector's ability to act as a financial
intermediary to support the economy."
The referendum outcome did not trigger much political
instability, with Gentiloni quickly installed at the head of a
cabinet almost identical to Renzi's, and economic data and
borrowing costs have also been little changed since the vote.
($1 = 0.9406 euros)
(editing by Richard Lough, Larry King)