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ITALY'S ECONOMY STIR CONCERN ACROSS CHINA


http://europe.chinadaily.com.cn/business/2011-05/24/content_12567889.htm)

But some call S&P’s downgrade of sovereign debt outlook unfounded

BEIJING – The lower outlook for Italy’s sovereign debt triggered wide concern across China as it could add uncertainty to the bumpy recovery of Europe, the country’s largest trading partner. However., some analysts said the concerns are unnecessary.

Zhuang Jian, senior economist at the Asian Development Bank, told China Daily that because Italy is a major eurozone economy, its downgraded outlook could negatively affect views of the economic situation of Europe as a whole, and affect China’s exports to some extent.

However, it is still too early to assess clearly, Zhang said. “Although it may add to concern about the region, there will be no crisis because key global institutions, such as the International Monetary Fund (IMF), have already evaluated the European sovereign debt problem and prepared plans to deal with possible risks.”

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Standard & Poor’s, a prominent rating agency, downgraded the outlook on Italy’s government debt from stable to negative on May 21, mainly because of concern that the government may struggle to cut the country’s vast public deficit. The downgrade indicates there is a one-in-three chance that Italy’s credit rating will be downgraded in the next 24 months, it said.

“In our view, Italy’s current growth prospects are weak, and the political commitment for productivity-enhancing reforms appears to be faltering, and potential political gridlock could contribute to fiscal slippage,” Standard & Poor’s credit analyst Eileen Zhang said. “As a result, we believe Italy’s prospects for reducing its general government debt have diminished.”

The move stirred more concerns about European sovereign debt shortly after the eurozone countries approved a 78 billion euro ($110 billion) bailout – with a contribution from the IMF – for Portugal on May 16. Portugal is the third victim of the sovereign debt crisis after Greece and Ireland. Some countries were concerned that the crisis would spread from Greece, Ireland, Portugal, and Spain to the region’s major economies.

But according to Dong Xian’an, chief economist at Peking First Advisory, S&P’s decision is groundless, and Italy has been on the track for recovery since the second quarter, while the economic growth of the United States and Europe has slowed.

He said that the judgment of rating companies is not reliable and there is no reason to worry about Italy. “Instead, the ongoing overtightening measures of China’s central bank are likely to hurt the global economy, including Italy and all of Europe, in the future, and that would in turn make the world’s second-largest economy suffer,” he said.

Giulio Tremonti, Italy’s finance minister, characterized S&P’s move as “strange”. He said the decision was made without “even one example of a decline in the economy or public finances to justify downgrading the forecast”.

The European Commission, the International Monetary Fund and the Organisation for Economic Co-operation and Development (OECD) had made “very different” appraisals of the condition of the country’s financial health, according to the Italian Treasury.

The third-largest eurozone economy won’t return to its pre-recession level for at least another two years, the OECD said in a report.

Italy has one of the highest levels of public debt in the world – 120 percent of GDP – but has succeeded in reducing its deficit, according to Agence France-Presse.

In April, the Italian government cut its forecast for economic growth in 2011 to 1.1 percent from previous estimates of 1.3 percent, and to 1.3 percent in 2012 from 2 percent.


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