Italy: S&P rating upgrade surprise - BBH

Two developments took place before the weekend that could lift Italian asset prices at the start of the new week as Italy's sovereign rating was unexpected upgraded by S&P to BBB from BBB-, explains the research team at BBH. 

Key Quotes

“A politically-motivated attempt not to give Bank of Italy Governor Visco a second term was successfully repelled.  The upgrade brings S&P to where the other two main rating agencies put Italy.  S&P had regarded Italy's sovereign risk one step above junk, and the rating increase is a positive development.  It is the first the S&P has given Italy in three decades. The reasons it cited are also instructive:  stronger growth outlook, better employment, and improving banking sector.  Earlier this month, the Bank of Italy indicated that the banking system insolvent loans had fallen to three-year lows.”

“Market Impact:  Italy's 10-year bond yield has fallen 30 bp since earlier this month through the pre-weekend low, which approached the 1.90% area which has been a floor since January.  However, with a roughly 60 bp premium over Spain, there is scope for additional outperformance.    The Italian premium over Germany, however, is already near the least of the year (~150 bp).  Further significant outperformance may be difficult to sustain.  Italy's FTSE- MIB set new two-year highs before the weekend but settled poorly.  The bank index, in particular, was weak, losing nearly 1.7%.  There may be scope for better a better performance.”