Moody’s cut Italy’s ratings from Aa2 to A2 yesterday (Tuesday), citing growing macroeconomic risks, and market participants braced themselves for downgrades of several obbligazioni bancarie garantite.

The main drivers for the three notch downgrade comprised: a material increase in long term funding risks for a euro-area sovereign with high levels of public debt; increased downside risks to economic growth due to macroeconomic structural weaknesses and a weakening global outlook; and implementation risks and time needed to achieve the government’s fiscal consolidation targets to reverse the adverse trend observed in the public debt, due to economic and political uncertainties.

Moody’s – which left the rating on negative outlook – said the downgrade reflected the weight of these growing risks relative to some positive credit attributes, including a lack of significant imbalances in the economy or severe pressure on private financial and non-financial sector balance sheets, as well as the actions undertaken by the government over the summer.

The mortgage OBG programmes of Banca Carige, Banco Popolare, Monte dei Paschi di Siena, and Banca Popolare di Milano, and the public sector covered bond programmes of Cassa Depositi e Prestiti (which is not under OBG legislation) and Intesa Sanpaolo, were put on negative watch when the sovereign was placed on negative watch in June.

“We expect that these six programmes will lose their Aaa rating,” said Dexia analysts today (Wednesday). “The covered bond programmes of Intesa Sanpaolo [mortgage], Banco Delle Marche, Credito Emiliano, and UBI Banco were not put on negative watch, but may still be at risk of a downgrade, as their TPI leeways at Moody’s are respectively zero, zero, one, and two notches.”

Dexia added that the mortgage covered bonds of UniCredit SpA may be the only Italian OBG programme that can keep its Aaa rating at Moody’s.

Michael Michaelides, senior covered bond analyst at RBS, said UniCredit and Intesa Sanpaolo were the only Italian banks rated above the sovereign, at Aa3, by Moody’s, and therefore the most likely to be affected.

“Ultimately, we’ll see an impact on the covered bonds,” he said. “Intesa mortgage covered bonds have a TPI of ‘improbable’, so they will likely be downgraded once the bank is downgraded.

“There are also other public sector covered bond programmes in Italy that are on review for downgrade,” he added. “We are waiting to see if they will add more overcollateralisation or other credit enhancements, otherwise downgrade would be likely.”