Moody's significantly downgrades Italy

MacMickster

It is possibly useful to compare what is happening to countries such as Italy with what is happening to individuals in the UK.

For Italy, this latest downgrading is likely to become a self-fulfilling prophecy. The national finances of Italy are clearly under pressure, but to date it has always managed to service its debts and is not in anything like the position of Greece. It simply can't afford to pay off all of its debts in one go, so is reliant on being able to roll over much of its borrowing from time to time.

The downgrading of its credit rating will make borrowing more expensive yet again, making it less and less likely that it will be able to service its debts in the future, and consequently there will be further cuts in its credit rating shortly.

In the UK there is evidence that mortgage borrowers are under pressure. Record numbers are receiving some level of forbearance from their lenders (such as paying interest only). In addition, many others who managed to obtain cheap mortgage deals a few years ago, having come to the end of their cheap fixed-rate deals find that they are unable to obtain any new mortgage deal so are stuck with their current lender's standard variable rate.

The saviour for these people at the moment is the low UK interest rate, and hence the low SVRs charged by lenders. If we see their interest rates increased then those individuals will be placed under the same pressures as the Italian government, with them consequently being unable to service their debts in the future.

For these individuals, this is an outcome which would be unwelcome for them, and if repeated over a large number of individual borrowers, unwelcome for the lender and the wider economy alike.

Similarly, surely pushing Italy, Spain, Portugal, Ireland towards default en masse would be an outcome with no winners, taking down banks and the world economy.