Italy’s investment-grade rating is at risk from the economic shock caused by the coronavirus, and the odds of the nation keeping it hinges on the European Union’s response, according to Goldman Sachs Group Inc (NYSE:).
S&P Global Ratings is set to review the nation Friday and currently ranks it at BBB, two notches above junk, with a negative outlook. A downgrade would raise the prospect of another in the coming months, and see the yield premium on Italy’s 10-year bonds over German equivalents widen to 280 basis points from around 244 currently, according to the U.S. bank.
Investor expectations on Italy’s credit profile may influence demand at a syndicated sale of five- and 30-year securities, which opened Tuesday. Benchmark 10-year yields rose 19 basis points this week to 1.98% as the market braced for fresh supply.
“Italy’s proximity to the investment-grade cusp suggests additional market risk around upcoming decisions,” Goldman strategists George Cole and Sara Grut wrote in a note to clients. “The EU policy response is likely key to determine the next move.”
EU leaders are set to hold a video conference Thursday, with countries such as Italy and Spain calling for joint debt issuance to share the costs of cushioning a pandemic-induced recession. Any such announcement should prove to be a boon for peripheral euro-area bond markets, though Germany and the Netherlands have so far opposed the proposal.
Demand for Italian debt may remain muted ahead of the EU summit and the rating review, according to Commerzbank AG (DE:). Moody’s Investors Service rates the nation at Baa3, the lowest investment grade.
Italy could face an investor exodus should it be downgraded to junk, as many portfolio plans mandate an investment-grade rating. Goldman estimates that passive holdings of the nation’s debt are at around 100 billion euros ($108 billion). Barclays (LON:) Plc sees outflows of as much as 200 billion euros if the rating is cut below investment grade.
©2020 Bloomberg L.P.
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