Fitch affirms Italy's A- rating, outlook negative

Fitch Ratings affirmed Italy's "A-" credit rating on Friday, pointing to progress on cutting its public spending deficit, but kept the outlook negative citing the risk of possible political and policy instability following upcoming elections. "The current rating is based on the assumption that a stable new government will be formed shortly after the forthcoming elections and the government's policies will be consistent with recent structural reforms, and further measures to enhance the economy's competitiveness and growth potential will be adopted," said Fitch in a statement. Fitch's affirmation of Italy's rating comes after a tops-turvy week in the country's politics. Caretaker prime minister Mario Monti announced he would step down, triggering early elections in February, after loosing the support of the party of disgraced former prime minister Silvio Berlusconi, who said he would stand for a fourth term. Monti, who has headed for the past year a technocratic government credited with pulling the economy back from the brink of needing a bailout, has declined to say whether he would stand in the elections. In affirming the "A-" rating, Fitch cited Italy's progress in balancing public spending, saying the country is line to generate a surplus of 3 percent this year before debt payments. Fitch said "an underlying budgetary position close to that necessary to stabilise the government debt to GDP ratio and a sustainable pension system ... underpins confidence in the long-run solvency of the Italian state." Despite the recession triggered by pushing through sharp fiscal consolidation measures this year, Fitch said it believes Italy will avoid a self-reinforcing debt trap. The ratings agency said the pledge by the European Central Bank to stand ready to buy unlimited amounts of debt of eurozone countries that implement reforms under bailout programmes eased stress in the bond markets, including for Italy. Fitch said that its baseline scenario saw the Italian economy beginning to recover in the second half of next year, mostly due to improving external demand. However it cited possible government instability following the forthcoming elections and prolonged uncertainty over economic and fiscal policies and policy continuity as a factor that could lead to a downgrade. The failure to get the public debt, which data released on Friday showed has broken the symbolic two trillion euro threshold, on a sustainable downward path could also prompt a downgrade, as could a general aggravation of the eurozone debt crisis, added Fitch.