Moody's doubtful of Italy reforms but plays down euro exit risk

By Virginia Furness

LONDON (Reuters) - Ratings agency Moody's said it was questionable whether Italy's current political environment would allow key structural reforms to take place but played down the possibility that Rome could exit the euro zone.

Italian financial markets and the euro sold off earlier on Tuesday after Carlo Borghi, a lawmaker from one of the two ruling parties, said most of the country's problems would be solved if it returned to its own currency. They recovered somewhat after he said the country was not planning to leave the euro

Moody's, which rates Italy Baa2 with a negative outlook, is due to provide an updated decision on Italy's credit rating by the end of October at the latest, having delayed its scheduled review from September 7.

The agency said in comments released for publication late on Monday that the review for possible downgrade hinged on Italy's debt trajectory and economic growth, both of which are linked to structural reforms being implemented

"Italy has long had an elevated debt burden and has long had problems generating economic growth and the political environment that can allow structural reform efforts to take place is also in question," Sarah Carlson, senior vice president in the Moody's sovereign team said in a conference call.

"It comes down to the debt trajectory and growth which is linked to structural reform effort," Carlson added.

Investors are concerned that a higher-than-expected budget deficit of 2.4 percent will weaken Italy's ability to service its debt pile of 131 percent of gross domestic product and risk lowering its credit rating, putting it on the cusp of falling below the investment grade category.

However, Moody's played down fears for euro zone stability stemming from Italy and the possibility of the country exiting the single currency, noting Italians had shown reluctance to leave the euro. Italy was "more integrated with Europe than has been feared over the past few years", the agency added.

Fitch reviewed Italy in August and while it kept the rating unchanged at BBB, it put Italy on negative outlook. S&P reviews Italy on October 26. It currently rates Italy at BBB with a stable outlook.

(Reporting by Virginia Furness; Editing by Sujata Rao and Peter Graff)