###POV: RATINGS CONCERN OVERDONE? Market......>

ITALY: ###POV: RATINGS CONCERN OVERDONE? Market caution over a potential ratings

downgrade Friday evening has widened BTP spreads, but concern looks overdone.

- Consensus is for 'no change' from S&P's BBB rating. At its last review in

October 2018, S&P held at BBB, but lowered outlook from `stable` to `negative`.

- Raiffeisen holds the most negative sell-side view we have seen, assigning a

50% probability of a downgrade this evening, citing a worsening fiscal outlook.

- Bloomberg consensus is for GDP growth of just 0.1% in 2019 and 0.7% in 2020.

In October 2018, S&P forecast 1.1% and 1.4% in those years, respectively.

- But conversely, consensus on the fiscal deficit is more forgiving, with a

shortfall of 2.6% of GDP seen in 2019 (vs S&P forecast in October of 2.7%).

- Political risk is crucial, so a downgrade tonight may well prove premature.

- By the time of S&P`s next review in Oct 2019, EU elections (May) and possible

early Italian vote (by Sep?) could clarify the state of play. Snap elections

could prove a market positive if League does well, as most polls suggest.

- A negative prognosis is priced in, with BTP spreads at 2-month highs.

Reminder: 10-Yr BTP/Bunds narrowed 13bps following S&P review last October.