The Pound to Euro exchange rate opened for the week slightly higher at 1.1490 (GBP/EUR) as traders reacted to the news that Fitch have downgraded Italy’s sovereign credit rating from A- to BBB+ with a negative outlook.
The Italian economy contracted by -2.7% in 2012, its Unemployment Rate hit an all-time record high of 11.7% in January, it owes around €2 trillion of public debt, and to make matters worse it does not have a stable government to steer it down the path of fiscal consolidation.
The latest general election saw none of the candidates gain enough votes to form a majority government; centre-left leader Pier Luigi Bersani won a small minority in the Italian lower house, but did not receive enough votes to take control of the senate. Bersani has ruled out the possibility of forming a grand coalition with former Prime Minister Silvio Berlusconi, and former comedian Beppe Grillo has vociferously rebutted the possibility of his Five-Star Movement party joining forces with any of the established political powers in Italy. Outgoing technocratic Prime Minister Mario Monti only received 10% of the vote.
The results have left Italy stalled in political gridlock and it is now looking increasingly likely that the Italian debt-to-GDP ratio will increase to 130% by the end of the year as economic reform is put on hold.
Fitch said:
“The inconclusive results of the Italian parliamentary elections on February 24-25 make it unlikely that a stable new government can be formed in the next few weeks.
The increased political uncertainty and non-conducive backdrop for further structural reform measures constitute a further adverse shock to the real economy amidst the deep recession.”
The credit rating agency also revised their growth forecasts for Italy to -1.8% this year.
Politicians in Italy reacted very differently to the news, highlighting the political discord that stands in the way of a stable government. Enrico Letta, Vice Secretary of Pier Luigi Bersani’s centre-left coalition, said:
“There is no time to lose, political forces should find a compromise on a new government otherwise the country heads towards disaster”.
Whilst Angelino Alfano, Secretary of Berlusconi’s centre-right party, seemed less phased by the credit rating downgrade:
“The rating agencies are not the bible, they are private companies whose aim is financial profit. For us it would be better to return to the ballot boxes in June than to push the country towards a disaster”.
Markets punished the single currency for the uncertainty in its third largest economy, but the majority of the Euro’s declines came as a result of the stimulus-busting US Non-farm Payrolls report. Smashing past forecasts of 160,000, the US economy added a staggering 236,000 new jobs during February, bringing the US Unemployment Rate down from 7.9% to 7.7%. The optimistic print moved the Unemployment Rate a step closer to the 6.5% target that the Federal Reserve have specified as an endpoint to their expansive quantitative easing scheme.
The Pound to Euro exchange rate (GBP/EUR) grew by around 0.4 cents to reach a daily high of 1.1525 on Friday as investors scaled back their QE3 forecasts. The Euro to US Dollar exchange rate (EUR/USD) declined by around -1.3 cents to a 3-month low of 1.2956 in response to the risk-damaging report.
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