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S&P cuts Italy rating, says pensions a worry

ITALY - Standard & Poor’s Ratings Services has lowered its long-term sovereign credit ratings on Italy to AA- from AA, citing weak public finances and rising pension expenditure.

S&P said it made the rating cut “due to the deterioration of public finances both in 2004 and beyond”.

It added: “Adding to fiscal strains, Italy will have to meet the challenge of one of the most adverse demographic profiles of all rated sovereigns, which has already contributed significantly to the recent fiscal degradation.”

“Pension spending rose by 0.2% of GDP to 14.4% of GDP in 2003, and is likely to continue upward despite a pension reform proposal that would start to rein in spending gradually from 2008.”

“In addition,” the rating agency said, “failure to contain age-related spending will inevitably put pressure on Italy’s creditworthiness in future years.”

S&P said Italy’s central government cash deficits have risen “significantly” in 2004, adding that further widening could be expected in 2005 if ambitious planned tax cuts of around 12 billion euros (0.9% of GDP) are implemented.

S&P said the government’s difficulties in addressing fiscal imbalances “bode poorly for the prospect of reversing Italy’s weakening fiscal position and achieving long-lasting structural budget improvements”.

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