* Fitch, S&P face landmark trial over Italy downgrades
* Rating agencies reject all allegations
* Unlikely that Fitch pulls ratings on Italy-strategist
By Stephen Jewkes
MILAN, Nov 14 (Reuters) - Fitch Ratings may reconsider its operations in Italy after its Italian unit and two employees were accused in an investigation of leaking information about sovereign debt downgrades, it said on Wednesday.
Prosecutors in the southern Italian town of Trani are seeking a trial for seven former and current employees at Fitch and peer Standard & Poor’s for allegedly leaking information about their downgrades during market hours.
If the case goes to court, it would represent the first trial in Europe over liability of rating agencies and reshape the way agencies release their reports at a time of increased global economic uncertainty.
Calling the case “an unprecedented manoeuvre that lacks any merit”, Fitch said in a statement on Wednesday it had restricted with immediate effect its market communication on ratings for Italian entities and issuance to formal published research only.
“All teleconferences, conferences in Italy and any similar events for the purpose of discussing Italian entities are suspended, and questions from third-party market participants such as investors or journalists will be referred back to our published comments,” it said.
“If Fitch does not receive adequate assurances that this type of incident will not be repeated, we may have to re-evaluate the future of our operations in Italy.”
Fitch’s Italy unit and S&P’s branch in London are also probed under an Italian law which holds companies liable for alleged crimes committed by their employees, judicial sources told Reuters on Wednesday.
Both S&P and Fitch have rejected the claims and a judge will have the ultimate say over whether to launch a trial.
The case focuses on a series of credit downgrades since 2011, including one by Fitch in January 2012, which prompted steep losses on Italy’s stock and bond markets.
Prosecutors say Fitch released comments on its upcoming downgrade of Italy before the rating cut was announced.
On Tuesday Fitch said it had communicated a possible downgrade of Italy when it placed the country on Rating Watch Negative in December 2011. Its public comments in January referred to that report, it said.
Analysts say investors care more about ratings than comments and see it as unlikely that Fitch withdraws from Italy.
“It’s hard to see them (Fitch) actually going through with that threat because it may not go well with clients,” Lyn Graham-Taylor, rate strategist at Rabobank in London, told Reuters.
“If you’re a French corporate, for example, and see that you’re going to think: What? So if you get annoyed by my government, you’re not going to rate me any more?,” he said.
In the extreme scenario that Fitch ever decided to pull its evaluation of the country, this would prompt investment funds to readjust their average ratings, he said, adding this would have little impact on the bond market.
“If a fund used the lowest rating and that was Fitch, it means that the fund would shift to using a higher rating on that bond and would buy more. Conversely, if it uses the highest rating, it will have to sell.”