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S&P Places Italy On Negative Outlook

May 2011 - Tax & Private Client. Legal Developments by Hassans.

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The country's political uncertainty, which has weakened its prospects for economic recovery and increased the perceived risks associated with the government's fiscal debt reduction programme, has led Standard and Poor's (S&P) to lower the outlook on Italy's credit rating.

While changing its outlook on Italy's credit rating from stable to negative, S&P has not taken the step of cutting Italy's ratings from their current levels of A+ long-term and A-1+ short-term, but it was said that the chances of such a reduction within the next two years is now one in three.

The reduction to S&P's rating outlook took the markets and the government by surprise. Both the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD), in recent reviews of Italy's situation, had appeared more positive.

The IMF, in fact, had praised Italy's commitment to deficit reduction, while also warning that the government's target of 3% by 2012 was perhaps unlikely, given its optimistic revenue assumptions. The current deficit of 4.5%, it said, was one of the lowest in the euro area, but a public debt of 119% represented one of the highest. However, it saw fiscal consolidation and strengthened financial stability as making the economy more resilient.

Furthermore, the OECD, in its latest survey, offered measured praise of Italy's reaction to the global recession, stating that recent measures designed to be budget neutral, rather than following a deficit-increasing fiscal stimulus plan, demonstrated an appropriate approach. Its Secretary General Angel Gurra even said that the government's action during the economic crisis was a "testament to prudent policy making".

However, both of those institutions also concluded that a bold and comprehensive structural reform programme would be necessary to achieve sustained economic growth and contribute to fiscal consolidation.

Picking up on this need for reform, S&P said, in its review, that the fragility of Italy's governing coalition has brought into doubt its commitment to structural reforms, and, in particular, pointed to a delay in necessary tax reforms.

In reply, Italy's Treasury has pointed out that the only new element in S&P?s analysis was the possibility of political policy paralysis, which, it said, should be completely excluded from consideration. Giulio Tremonti, Minister of the Economy, added that the statistical information on which S&P had based its conclusion was at the least unchanged, and in some cases had improved, since it had confirmed its stable rating last December.

Tremonti also pointed out that the movement towards tax reform was accelerating. Earlier this month, in a multi-policied development decree, the government had introduced tax breaks without any new spending commitments.

In addition, while the government certainly has no spare resources available for a reduction in the country's overall tax burden, it is still expected to produce a tax reform package later this year, switching the level of taxes between direct and indirect taxes, and between financial and non-financial income.

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