Moody’s warns the Meloni government re-entering the fever on the BTP-Bund spread, Fitch punishes Liz Truss’s UK government fiscal crush, despite the sudden – and embarrassing – turnaround. The rating agencies seem to send a clear message to governments around the world: you can’t mess with debt. Consequently, any ‘spend and spend’ measure that does not take into account the conditions of public finances will provoke a harsh response, even rating downgrade to junk level, with disastrous consequences on the markets.
Willy-nilly, politics has its hands tied, forced to follow diktats of those who are known as, in the case of Italy in particular, the guardians of the spread. In the case of the United Kingdom, Fitch cut the outlook on the rating from “stable” to “negative”; a government beware Truss also came from Bloomberg with the article “Uninvestable’ UK market lost £300bn in Truss’s first month”, that is to say “The non-investable UK market lost £ 300 billion in the first month of Truss ”.
Scivolone Truss: ‘UK market not investable’
What happened was resumed with a tweet by Jean-Charles GAND, Chief Technical Analyst at Market Securities: the tweet was reported by the British newspaper The Guardian.
The reference is to the massacre that befell the London stock exchange and UK bonds during the first month of Liz Truss in power.
Bloomberg, reports the Guardian, has calculated that the market value of UK gilts and inflation-indexed gilt indices fell by as much as 200 billion pounds, since the UK Conservatives chose their new leader in early September.
The FTSE 350 Index – which includes the FTSE 100 blue chip index and the FTSE 250 – lost a capitalization of £ 77 billion approximately since the closing of last September 2nd.
Deficit and debt anxiety: Moody’s warns Meloni
A warning addressed to the upcoming new Meloni government: deficit anxiety is being punished and will also be punished in Italy.
An appetizer arrived yesterday with the ‘Italy garbage’ alert signed Moody‘s:
“We would probably downgrade Italy’s ratings if we were to see a significant weakening of the country’s medium-term growth prospects, due to the failure to implement growth-enhancing reforms, including those outlined in the NRP”, a bomb warning, launched at the imminent government of the leader of the Brothers of Italy Giorgia Meloni.
The rating that Moody’s has on the made in Italy public debt is Baa3; in addition, the outlook is negative. Which means that not only a downgrade is likely, but also that that rating downgrade will be enough to make Italian BTPs, in the eyes of the world, “junk”.
A rejection would in fact remove the Italian debt from the club “investment grade”. Moody’s fears what he said during the election campaign the same leader of the Brothers of Italy, who had not ruled out making any changes to the PNRR, in case of victory.
A hypothesis rejected in toto by the rating agency which explained that, in this case, the negotiations would delay the implementation of the plan drawn up by the Draghi government, “Exerting downward pressure on investment spending, in a situation where high inflation and energy supply risks are already weighing on economic activity.”
Moody’s unleashes BTP panic, there is also an ECB factor
The reaction of 10-year BTP rates is immediate, who also discounted the other news arrived from Frankfurt: in the months of August and September the share of BTP held by the ECB of Christine Lagarde as part of its PEPP program (or also pandemic QE – Pandemic Emergency Purchase Program) fell by 1.24 billion euros, as a result of the European Central Bank’s decision to let the Italian bonds expire, without reinvesting the sum in the purchase of new BTPs. I also see that in the two previous months of June and July the ECB had increased its stake in the public debt of made in Italy of € 9.76 billion.
The Moody’s-ECB mix and anxiety over the formation of the Meloni government have caused 10-year BTP rates to soar at the pace stronger since the beginning of the Covid pandemic, i.e. from March 2020.
The fear of the downgrade did actually go up the 10-year BTP rates of 30 basis points, at 4.48%. 
The BTP-Bund spread has increased by more than 5% exceeding the threshold of 242 basis points, approaching that level considered the danger threshold for the ECB. But if Moody’s warned the Meloni government, the other sister Fitch punished directly UK government debt and deficit anxiety Liz Truss, cutting the UK debt outlook from “stable” to “negative”.
Reason: thatshock announcement on the maxi tax cut plan arrived at the end of September.
In addition to triggering record-breaking sales on sterling and UK government bonds (the collapse of UK bonds has caused two-year yields to soar to a record since October 2007, and 10-year rates to jump to the highest value since 2010) , that announcement chilled equity and bond markets around the world.
LAWS The content of the shock plan for tax cuts
The escape was not only from the pound, but also from the euro, Wall Street and global equities.
The fixed income market has also been knocked out, which has witnessed the flare-ups in the yields of US Treasuries and the same BTPs.
Result: The Bank of England was forced to intervene to end the panic and, in the end, the government of Liz Truss was forced to turn around and withdraw the plan.
The official news of the cancellation of the plan, just 10 days after its announcement, came a few days ago with the Twitter post from Chancellor of the Exchequer Kwasi Kwarteng, who explained that the decision to eliminate the 45% rate of income tax – a maneuver that would have benefited especially the richest – had become one “Distraction from our priority mission of addressing the challenges facing our country”.
Fitch cuts UK outlook on government deficit anxiety
Distraction that Fitch decided to punish anyway, citing among the reasons “The loss of political capital” by the Truss government (read loss of trust, of credibility).
The UK rating was confirmed at “AA-“. Fitch also pitted the estimates on the inflation rate, on the deficit-GDP and on the debt-GDP of the United Kingdom.
The rating agency expects inflation to rise by 8.9% in 2022, and then a gradual decline to 4% in 2024. Regarding UK GDP, Fitch estimates a contraction in 2023, despite the support that the government by Liz Truss has promised to counter the expensive energy and the expensive bills. Definitely, “Although the government has turned back on the elimination of the higher rate of 45%, its weakening at the political level could further erode the credibility and support of its fiscal strategy”, the rating agency explained.
Finally, Fitch predicts that the UK’s GDP deficit will rise to 7.8% in 2022 and 8.8% in 2023, against a debt-to-GDP that will grow to 109% by 2024. Beyond forecasts the message of Moody’s and Fitch respectively to Giorgia Meloni’s Italy and Liz Truss’s United Kingdom is unequivocal: deficit and debt anxiety has consequences on the rating, therefore on the markets. Consequently, you can also proceed, but eventually you will be forced to turn around.