Tuesday, 20 September 2011

Moody's praise Italian Austerity Budget for Securitizations

As stated in the previous post, the recent downgrade of Italian sovereign debt by Standard and Poor's has prompted a few raised eyebrows at Moodys' unchanged rating of the debt. Moody's weekly report available here praised the Italian austerity measures as "surprisingly positive for term securitizations". The measures abolish the 20% surcharge on the cumulative amount of interest that has accrued on bonds that amortise in their first 18 months. The measure is credit positive for securitization because they no longer will bear negative carry. Negative carry results from lower interest earned on retained principal than interest paid on notes, according to David Bergman, analyst at Moody's. By removing the surcharge, there is no longer a need for a lock-up period, thereby saving negative carry costs.

By contrast, the consensus at Moody's appears to be that the other austerity measures expand on earlier measures but will have little effect. The latest round of measures aim to eliminate government deficit by 2013 as opposed to the earlier 2014. The measures contain the usual you'd expect to find in deficit reduction plans - increased taxation and reduced spending, and again, as in Greece and much of the rest of the Eurozone, a crackdown on tax evasion forms a significant element of the anticipated increase in tax revenue. A further one point increase in VAT to 21% will come into effect on 17th September, and an extra levy on those earning over €300,000 is also being introduced.

More here when Moody's reappraises Italian debt this week.

The austerity measures are included in law decree 138/2011, which in Italy is popularly called “Manovra Bis”.

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