Italy can adjust to challenges posed by economic crisis, says Moody’s

Although the current global economic crisis is posing important socio-economic challenges for Italy, its rating outlook remains stable. The deterioration expected in the government's debt metrics is considered within the scope of the country's adjustment capacity in the medium to long term, Moody's Investors Service said in a new report.
Italy is rated Aa2 with a ‘stable’ outlook.
Italy's economic growth has been relatively meagre for many years, reflecting the structural weaknesses of the economy and its ageing population. "Going forward, Moody's believes it will be difficult for Italy to achieve growth at even this slow pace," said Alexander Kockerbeck, a Moody’s Vice President-Senior Credit Officer.
However, Italy does not appear as a particular outlier as an Aa-rated sovereign. Whereas growth in a number of developed economies depended on unsustainable debt-fuelled spending by the private sector, private debt is not a problem for Italy. "Italy's private sector has low debt and a healthy savings buffer," said Kockerbeck. "Furthermore, a globally less exposed banking system reduces the risk of large shifts from private to public debt as has occurred throughout the industrialised world."
The analyst said that lower total country debt and high net worth of all economic agents will assist the government in stabilising its own debt, albeit at a high level.
As a consequence, Moody's does not expect a medium- to long-term deterioration in the three characteristics that determine whether debt is sustainable: affordability, reversibility or finance-ability. "Although Italy's debt metrics will reflect pressure on the government's balance sheet due to the recession, prevailing low interest rates mean that Italy's debt affordability has not worsened," explained Kockerbeck.
Furthermore, Moody's believes the Italian government's very high adjustment capacity will enable it to cope with the additional fiscal pressure caused by higher deficits and interest rates, eventually allowing the country to reverse its unfavourable debt trajectory. Such capacity, as well as the economy's ability to live with higher public debt, has already been demonstrated over more than a decade.
Improvements in the structure of Italian public debt management also point to very high debt finance-ability, especially as Moody's does not foresee dramatic shifts in general government borrowing requirements. The elongation of the government's debt structure that took place in the last decade means that Italy's debt affordability would worsen only slowly, even if interest rates were to rise substantially. It is likely that the government's interest burden would still remain below the high levels experienced in the 1990s.