As Italy adopts a confrontational stand on the budget, Rome’s political capital in Brussels and Frankfurt is eroding.
Fitch on Wednesday downgraded the credit profile of five systemically significant Italian banks, namely UniCredit, Intesa Sanpaolo, Mediobanca, Credem and BNL.
The agency made an explicit link between the credit rating of the banking sector and political risk. On Friday, August 31, Fitch downgrade its Italian sovereign debt outlook from “stable” to “negative.” The moves on Wednesday was perfectly symmetrical. The long-term credit rating of Italian lenders remains BBB and, therefore, investment grade, just like the state.
In this context, European Economic and Financial Affairs Commissioner Pierre Moscovici told El Pais that if Italy were to breach the 3% deficit budget limit, it would be “a big step back,” adding that it is in Italy’s interest to reduce its debt.
Moscovici was referring to warnings by deputy prime minister Luigi Di Maio last Friday and Matteo Salvini on Monday that their political priorities would be met irrespectively of the 3% budget deficit limit.
Italy has the second biggest debt-to-GDP ratio after Greece.
Italy’s overall political capital in Brussels is suffering.
According to Reuters, Rome has very few chances of securing an Italian appointment in the European Central Bank’s six-member executive board after Mario Draghi steps down in 2019. This would shift the balance of the policy debate on inflation at a time when markets are mounting pressure on Italy’s credit profile, public and private.