S&P reaffirmed Italy’s BBB rating on Friday as the agency recognised Italy can still rely on a ‘wealthy, diversified economy and a strong external position’. While in line with consensus expectations, this rating reaffirmation has triggered a mild rally on BTPs, as fears of Italy moving into junk territory are fading and current valuations are much wider than similarly-rated countries.
At the same time, S&P changed the outlook from stable to negative. We believe the rationale behind such a change confirms investor worries that drove the spike in Italian spreads, such as overly optimistic growth expectations, high odds of deteriorating fundamentals, reform reversals and increased policy uncertainty.
All these factors deteriorated investor confidence which, in our opinion, remains the main reason behind the current additional premium on Italy, as current fundamentals and ratings are not enough to justify a 300 bps spread. For this reason, we do not expect a sustained and prolonged relief for Italian assets until confidence is restored. Market reaction so far supports this view, as spreads remains close to 300 bps and Italian bank stocks are only mildly rebounding.
Antonio Ruggeri, manager of the OYSTER European Corporate Bonds fund at SYZ Asset Management