MILAN, May 18: Italy’s stronger public finances are one of the main reasons for keeping its sovereign debt rating one notch above that of Spain, ratings agency Moody’s Investors Service said.

“Its (Italy’s) stronger fiscal metrics allow it more time to address its structural impediments to growth,” Moody’s said in a report. The agency said Italy had managed to keep relatively low budget deficits over a long period of low growth, while Spain has had one of the most marked deteriorations among developed economies during the crisis.

Italy, which has the eurozone’s second-largest debt after Greece as a percentage of gross domestic product, had a budget deficit of three per cent in 2012, according to Eurostat, which put Spain’s deficit at 7.1 per cent, excluding bank recapitalisations.

Italy and Spain, the eurozone’s third and fourth largest economies are potential flashpoints in the eurozone debt crisis even though last July’s pledge by the European Central Bank to save the euro has mitigated the risk.

Italian bonds have outperformed Spanish debt since the creation of a government in Rome earlier this year helped fill a damaging power vacuum. The new right-left coalition government of Enrico Letta has made reviving growth and cutting soaring youth unemployment its top priorities, as Italy struggles to come out of its longest recession since quarterly statistical records began in 1970.

In its report issued late on Friday, Moody’s said headline and structural budget deficits are significantly smaller in Italy than in Spain, adding that Rome’s public debt ratio is expected to peak in 2014 compared with 2016 in Spain.

In addition, Spain’s public finances have been undermined by weak regional government finances and the need to support parts of the banking system, the agency said. But Moody’s noted it expected a stronger growth recovery over the medium term in Spain than in Italy.

“Spain has advanced further in correcting the loss in its external competitiveness and — given the government’s absolute majority in parliament — the Spanish authorities should also be able to implement further structural reforms more easily,” Moody’s said.

Letta’s fragile coalition is having to balance pledges to keep Italy’s budget deficit below European Union limits of three per cent of gross domestic product with demands from the diverse coalition members. Moody’s affirmed Italy’s Baa2 rating after Letta’s administration took office. Spain has a Baa3 rating, one notch above junk, with a negative outlook.

Italy has raised about 65 per cent of this year’s expected0 issuance of 186 billion euros, while Spain has met just over half its 121bn euro target, according to Reuters data. —Reuters