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Italy risks Greek like crisis

 S&P Global Ratings said in a report on Friday that Italy could face a Greek-like financial crisis if the government approves an "unorthodox" budget law later this year. "Under an alternative scenario in which policymakers pursue unorthodox solutions -- such as the mooted introduction of a parallel currency or unfunded budgetary measures -- to evade the fiscal constraints established by the EU treaties, Italy's membership of the eurozone could be questioned," S&P said in its midyear report on 'European Developed Sovereign Rating Trends'. 

"En extremis, this might become a rerun of the June 2015 Greek confidence crisis, but in a far larger and more systemic member of the EU".

The ratings agency said Italy is the only eurozone sovereign with a negative outlook. 

"After winning March 2018 parliamentary elections, Italy's current governing coalition moved quickly to put modest reform initiatives on ice and challenge the European Commission's legal mandate to oversee member states' compliance with the EU fiscal framework," the report said. "An open dispute between a national government and European institutions typically has second-round effects on an economy's private sector, including the funding base of a country's banking system. "That was the case for the much smaller economy of Greece (less than 2% of eurozone GDP) in June 2015. 

"The question is whether it will also be the case for the far larger economy of Italy (15% of eurozone GDP).

"Italy's public debt is denominated in euros, a currency which no European Monetary Union member can unilaterally devalue. "This means Italy, like all other eurozone members, does not have the same flexibility to inflate away the real burden of its public debt compared with countries that control their own currencies. "Hence, debt sustainability depends much more on eurozone members' capacity to expand in real terms compared with their peers outside the common currency area. Unfortunately, since 2010, the Italian economy has expanded just 0.6% in real terms versus 10.6% for the eurozone as a whole.

"Weak growth, and the failure of policymakers to address it, explain the negative outlook on Italy's sovereign rating".

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