Moody's upbeat on Italy DPEF, less so on pensions

Ratings agency Moody's on Thursday gave a broadly positive assessment of Italy's four-year economic plan approved last week, saying it aims to reverse the rising budget deficit and further consolidate public finances.
However, Sara Bertin, Moody's analyst responsible for Italy, said the agency was concerned about the direction of an ongoing debate over pension reform in Italy which risked increasing outlays.
Neither the economic plan (DPEF) nor the pension talks, would change the outlook on Italy's Aa2 sovereign debt rating, Bertin said, though the agency will look closely at the pension reform if and when it becomes law.
"The entire DPEF aims in the direction of further fiscal consolidation," Bertin said. "It's planning a decrease of the deficit, which is a change of trend ... and it plans a very, very slow but steady decrease of the debt." Moody's assessment, as has often occurred in recent years, is more positive, or less negative, on Italy than that of other ratings agencies and international bodies.
The DPEF raised Italy's 2007 budget deficit goal to 2.5 percent of GDP from 2.3 percent and was accompanied by a bill to provide 6.5 billion euros of extra public funding for people on low pensions, for families and young people.
"The ... talk of pension reform in the framework of fiscal consolidation does concern us, but does not put the rating under pressure," Bertin said. "We rate on facts so we will have to analyse the new reform when passed and see what the impact is on short-medium-long term structural fiscal expenditure and the sustainability of public finances."
Romano Prodi's centre left has pledged to repeal a pension reform done by the previous administration under then prime minister Silvio Berlusconi, which would raise the minimum retirement age to 60 from 57 from January 2008.
The government is involved in drawn-out talks with trade unions over how to safeguard at least some of the savings of around 10 billion euros per year that the Berlusconi reform guaranteed. Prodi has also promised to increase minimum pensions, but Bertin warned that the reform must not run counter to the goal of reining in public finances.
"It would not seem logical to increase pension expenditure in the short-to-medium term, when you are trying to implement fiscal consolidation." Bertin said Italy's Aa2 sovereign debt rating was stable and would not be revisited imminently. "Italy is Aa2, which is not triple 'A', it already embodies a lot of structural weaknesses," she said.
"The fact that structural expenditures are very high in Italy is already embodied in the rating. For the rating to go on downward pressure we will need to see a serious worsening of the trend." The International Monetary Fund on Tuesday called the DPEF "a step backwards," saying it failed to adequately tackle the deficit and debt and "falls short of what Italy needs." Standard & Poor's said it highlighted the weaknesses of the governing coalition, which was one of the main factors leading to S&P's downgrade of Italy last October.