Italy’s CDS markets price in super-sized sovereign credit rating cut

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Artisans and merchants gathered in Rome to demand that Parliament the new government in the midst of being formed make an urgent breakthrough in economic policy after the economic crisis shut down more than 372 000 businesses in 2013.

Italy’s political turmoil has left Credit Default Swap (CDS) markets pricing in a super-sized sovereign rating downgrade, which, if it happened, would push the country deep into “junk-grade” territory.

A gauge using CDS levels compiled by S&P’s Capital IQ analytics unit, known as a Market Derived Signal Score (MDS), now puts Italy’s government debt at a B+ rating rather than its current actual “investment-grade” BBB.

It is a five-notch difference on the rating scale and is the biggest gap between the two scores since mid-2012, when worries about a break-up of the euro zone were at their peak.

S&P and rival Fitch currently have “stable” outlooks on their BBB Italian ratings, which means no move is currently seen.