'Yes' vote best outcome for key Italy rating: DBRS
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Supporters wave flags during a rally led by Italian Prime Minister Matteo Renzi in downtown Rome, Italy October 29, 2016. REUTERS/Remo Casilli
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By John Geddie
LONDON (Reuters) - Rating agency DBRS said a 'Yes' vote in Sunday's constitutional referendum in Italy would be the best outcome for the country's credit rating, which is currently under review with the threat of a downgrade.
DBRS's rating is crucial for Italy because a cut to its A(low) rank would mean its banks have to pay more for European Central Bank funding under current rules. DBRS has delayed its review until after the referendum but must conclude it by Feb. 3.
Polls suggest Italian voters will reject the reforms on which Prime Minister Matteo Renzi has staked his future, potentially triggering renewed turmoil in the country's battered banking sector and pushing the euro zone back toward the edge of crisis.
"If a 'Yes' vote prevails, then we would assume Renzi stays in and he has a mandate to continue with his economic reform program. That would most likely be the best outcome from a credit standpoint," DBRS's co-head of sovereign ratings, Fergus McCormick, told Reuters on Thursday.
"If the referendum is defeated by a very wide margin, and then snap elections are called, this raises the political uncertainty... We are concerned about investor sentiment in this environment."
With 28 governments in 50 years, Italy is no stranger to political upheaval, but McCormick said further instability could not come at a worse time for the euro zone's biggest debtor.
"It may be that the market, consumers and investors will take this with rose-tinted glasses and say it's the same old political environment in Italy. Nothing has really changed.
"That's true, but there are two things that are different. One thing is that the debt burden is higher than it has been in the past, and second is that its banks are relatively fragile."
The biggest immediate loser if the 'No' camp triumphs could be Italy's third-largest bank, Monte dei Paschi di Siena, which is struggling with bad loans and looking to raise 5 billion euros ($5.3 billion) next week to stave off collapse.
Investors are likely to shun the operation if political chaos prevails, meaning state intervention will be needed to save the bank, creating further setbacks for Italy's growth.
"Our number one concern in Italy is growth. It has one of the lowest rates of productivity growth, potential output is about zero percent, and this is despite the very comprehensive reforms already produced by the Renzi government," said McCormick.
"Anything that can affect growth will have an immediate impact on the debt ratio which is at a very high level already... That has credit implications."
(Reporting by John Geddie; Editing by Marc Jones and Hugh Lawson)
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