S&P Lowers Italy’s Credit Rating; No Change for Generali

July 8, 2004

Standard & Poor’s Ratings Services announced that it has lowered its long-term sovereign credit ratings on the Republic of Italy to “AA-” from “AA”, due to the deterioration of public finances both in 2004 and beyond.

In a separate bulletin the rating agency indicated that the downgrade would not affect Assicurazioni Generali SpA, the country’s largest insurance group.S&P also affirmed Italy’s “A-1+” short-term ratings and its stable outlook.

“Italy’s central government cash deficits have risen significantly in 2004, and further widening can be expected in 2005 if ambitious planned tax cuts of around12.0 billion euros [$14.85 billion] (0.9 percent of GDP) are implemented,” stated S&P credit analyst Moritz Kraemer.

The bulletin noted that “the difficulties of the governing coalition to address fiscal imbalances bode poorly for the prospect of reversing Italy’s weakening fiscal position and achieving long-lasting structural budget improvements. Standard & Poor’s projects that Italy’s budget deficit will remain around 3% of GDP in the medium-term.”

Commenting on Generali, S&P said that its ratings and outlook (“AA”/Negative) remain unchanged. The bulletin noted that “while sovereign stress is factored into the ratings on Generali, the downgrade has no automatic impact on the ratings, as it is Standard & Poor’s policy that no non-government-supported entity within the EU has its ratings constrained by the foreign currency rating on the sovereign.”

It did note that the “downgrade of Italy is expected to have a marginal adverse impact on the credit quality of Generali’s invested bond portfolio, its tax burden, and the Italian insurance regulatory environment. In parallel, the Generali group has ready access to other significant bond markets within the Eurozone. Generali’s premium income is strongly diversified, with approximately 60 percent sourced outside Italy, including Germany, France, Spain, and Austria.”

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