"Ambitious" Renzi pushes Italy yields near 8-year lows

Reuters

* Italian yields dip towards eight-year lows

* Renzi forces Letta to resign as Italy's prime minister

* Markets view Renzi as "positive" change

* Moody's due to review Italy's ratings; no change seen

By Joshua Franklin and Marius Zaharia

LONDON, Feb 14 (Reuters) - Italian bond yields fell back towards eight-year lows on Friday as investors warmed to the prospect of centre-left leader Matteo Renzi becoming new prime minister with his pledge for a more "ambitious" government.

Renzi could be named prime minister as soon as this weekend after his centre-left Democratic Party leadership forced party rival Enrico Letta to resign after 10 months in power.

Renzi, who would be the country's youngest-ever prime minister, has criticised Letta for failing to introduce growth-boosting reforms as Italy has lagged an economic rebound in peripheral euro zone peers.

Data showed on Friday Italy's economy grew 0.1 percent in the fourth quarter, compared with 0.3 percent growth in the euro zone as a whole and 0.5 percent in Portugal.

Improving its growth prospects is key for Italy's attempts to curb a 2 trillion euro debt load, which is roughly 1.3 times its economic output.

Investors seemed to take the political changes well, with 10-year Italian yields falling 4 basis points to 3.68 percent, just 2 basis points shy of an eight-year low hit earlier this week. They traded around 3.78 percent before Renzi proposed the leadership change to his party late on Thursday.

"He (Renzi) has a longer horizon. He's said he wants to stay until the next general election which will take place in 2018. This gives room to pursue more challenging reforms," said Sergio Capaldi, a strategist at SanPaolo. "The market for the time being believes he will deliver."

Other analysts said Renzi's stronger hand risked turning his coalition partners against him in the longer run.

"There is a big risk actually this whole thing could actually blow up in a way that, at the moment, is not seen by the market," said Gianluca Ziglio, an analyst at Sunrise Brokers in London. "If Mr. Letta was not successful and he is someone who is a bridge between the two sides, someone who is going to be more on one side might find it even harder."

German 10-year Bund yields, the euro zone's benchmark, were up 1.4 bps at 1.68 percent after the forecast-beating euro zone GDP data, though further falls were tempered as bets for looser European Central Bank policy remained intact given ultra-low inflation.

HISTORICAL INSTABILITY

Renzi is due to lead Italy's third administration in a year and his coalition partner, the New Centre Right Party, said it did not expect him to last a full term until 2018.

The unstable political backdrop has been one of the factors to blame for Italian yields trading above their Spanish peers.

Spanish Prime Minister Mariano Rajoy has survived a corruption scandal in his party and has been able to push through reforms that have improved economic indicators beyond market expectations.

"You're going to get a reformist but he doesn't have that much experience and he will have to suffer with the same coalition. It's positive, but let's see," said Daniel Loughney, portfolio manager at AllianceBernstein.

Later on Friday, Moody's Investor Service is due to review Italy's credit rating, in accordance with new European regulations obliging ratings agencies to publish a calendar of when they might adjust their views on sovereigns.

Analysts do not expect any change in Italy's ratings or outlook and the agency may not make any announcement if it decides to maintain the status quo.

Moody's rates Italy Baa2, while Standard & Poor's ranks it BBB and Fitch has it on BBB+, all with a negative outlook and citing political fragility as weighing on its ratings.

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