WASHINGTON (MNI) – Standard & Poor’s Monday released an FAQ
providing further detail behind its May 20 decision to revise its
outlook on Italy to negative. S&P said “the sheer size of Italy’s
general government debt would make it very difficult for the
international community to provide an effective financial support
framework for Italy.” The following is the first part of the full text
of the FAQ:

On May 20, 2011, Standard & Poor’s Ratings Services revised to
negative its outlook on the ratings on the Republic of Italy
(unsolicited rating, A+/Negative/A-1+; see “Republic of Italy Outlook
Revised To Negative On Risk Of Persistent High Debt Ratio; ‘A+/A-1+’
Rating Affirmed”).

Here, we address some investor questions related to the outlook
revision and our view of Italy’s credit quality.

Frequently Asked Questions

What is Standard & Poor’s current opinion on Italy’s
creditworthiness?

Our ‘A+/A-1+’ ratings on Italy reflect our opinion of its
relatively wealthy and diversified economy, with GDP per capita at twice
the ‘A’ median. Nevertheless, we believe that Italy’s high general
government debt and interest burdens, alongside its economic growth
prospects, which we see as weak, are likely to continue to limit its
long-term policy flexibility.

We define an entity with a ‘A’ long-term rating as one that, in our
opinion, has strong capacity to meet its financial commitments but is
somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than obligors in higher-rated
categories. Corporate issuers with a rating in our ‘A’ rating category
have shown historical default probabilities just below 2% on a 10-year
cumulative basis. Among sovereigns, no issuer rated by Standard & Poor’s
in the ‘A’ category has ever defaulted over that time frame.

What is the significance of Standard & Poor’s negative outlook on
Italy?

A negative outlook indicates our view that the long-term credit
rating could be lowered, typically over a period of six months to two
years. For investment-grade credits, we assign positive or negative
outlooks when we believe that there is at least a one-in-three
likelihood that we could take a rating action over the ensuing two
years.

Why did Standard & Poor’s revise its outlook on its rating on Italy
to negative?

We see the key rating constraint for the Republic of Italy as high
public debt. Gross general government debt of over 120% of GDP and net
debt at 116% in 2011 constrains Italy’s fiscal flexibility, particularly
within the confines of a rigid monetary regime.

We revised our outlook on the ‘A+’ long-term foreign currency
rating on Italy to negative to reflect our view that the government’s
debt reduction plan faces increasing implementation risks because of:

* The rising possibility that GDP performance will fall short of
the government’s average real growth assumption of 1.4% between
2011-2014;

* The potential for protracted political gridlock that could result
in fiscal slippage; and

* A lack of political consensus supporting the timely
implementation of productivity-enhancing reforms to bolster Italy’s
growth potential.

Under our base-case scenario, we projects average real GDP growth
between 2011-2014 of 1.3%–just short of the government’s 1.4%
assumption. However, in our view, there’s an increasing risk that
average real GDP growth could weaken closer to our alternative scenario
assumption of 0.8% because of increasingly entrenched factor rigidities
and tightening external credit conditions. Lower growth rates would
likely weigh on tax receipts and require deeper cuts in primary
expenditures than envisaged in the current plan, which could also be
politically more challenging, in our opinion.

Political constraints reduce the possibility of frontloading
growth-enhancing reforms in controversial areas, such as labor market
and competition policies. The structural reform measures in the next two
years, as presented in the national reform program, focus mostly on the
energy sector and the educational system. In our view, they are unlikely
to be substantial enough to markedly boost productivity growth over the
next three to five years. Without improved economic growth, we believe
the government’s debt reduction plan will be in jeopardy.

Didn’t the Italian government operate one of the tighter fiscal
positions in Europe during 2008-2010?

Italy’s fiscal deficits during 2008-2010 were relatively low
compared to other large European countries. We saw that the sovereign
was already hampered by a very high government debt burden when the
global financial crisis began, giving it limited room to maneuver. In
recognition of these limitations, the government consciously chose not
to run significant expansionary countercyclical policies. We believe
that this cautious stance has helped to anchor investor expectations and
to date largely shield Italy from the ongoing European sovereign debt
crisis. Despite this, net general government debt increased to 116% of
GDP in 2011 from 100% of GDP in 2007, negating, in our view, all of
Italy’s fiscal consolidation efforts over the previous decade.

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** Market News International Washington Bureau: 202-371-2121 **

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