What's going on?
Fitch Ratings cut its outlook on Italian government debt from “stable” to “negative”, but the value of the country’s government bonds – perhaps surprisingly – rose on Monday. Mamma mia!
What does this mean?
Credit agencies like Fitch assess how likely a company or country is to pay back its debts (like Experian does for people). Fitch believes there’s a risk Italy’s new government could add even more to its current debts – which are already a third larger than the country’s entire economy – making missing a payment (a.k.a. a default) more likely in the future.
Italy’s government said the country’s deficit – essentially money it spends that exceeds what it receives each year – will increase next year as Italy spends more, coming close to a limit imposed by the European Union (it shouldn’t exceed 3% of the size of a country’s economy).
Why should I care?
For markets: A sigh of relief from investors.
The yields of Italian government bonds fell on Monday as the price rose (they move in opposite directions). Investors had been selling the bonds throughout last week, as they expect Italy’s spending to rise. Although Fitch cut its outlook, it left its “rating” unchanged – meaning Italy’s debt’s still considered “investment grade” (i.e. safe enough for most investors, as opposed to “junk”) – which may have caused investors to question their decision to sell. Italy plans to share its financial targets in September, followed by a full budget in October.
The bigger picture: Give Europe a chance, folks.
According to analysts at investment bank, Morgan Stanley, now’s the time for investors to take a closer look at European stocks. Investors have pulled $40 billion out of European stocks so far this year – instead preferring the heady heights reached by US stocks recently. Despite the risk posed by higher Italian spending, Morgan Stanley believes the region’s stocks look attractive – especially shares of European banks.