Slow pace: Workers at the assembly line at the Lamborghini plant in Sant’Agata Bolognese. The Italian economy is struggling to build momentum, and the government has cut its outlook for growth this year to 0.6%, down from a target of 1.2%. — AFP
ROME: Italy’s credit score is skewed toward a potential upgrade at Moody’s Ratings, which has just joined rivals in rewarding Premier Giorgia Meloni’s push for fiscal restraint.
The eurozone’s third-biggest economy remains at Baa3, one step above junk, but now has a positive outlook on that, with the credit assessor shifting its view.
The change “reflects the improved fiscal outlook against the backdrop of a better-than-expected fiscal performance in 2024, and a stable domestic political environment which increases the likelihood of fiscal metrics continuing to improve,” Moody’s said in a statement.
The win for Meloni and her colleagues is all the more poignant in a month when Moody’s drew the global spotlight in financial markets for stripping the United States of its last remaining top rating.
The decision duly prompted Treasury yields to surge.
Italy’s path toward an improved credit status brings the company more in line with rivals.
They have commended the government for political stability and budgetary restraint that have put its deficit on track to fall below the European Union’s 3% ceiling by next year.
In April, S&P Global Ratings suddenly raised the country by one notch. Fitch Ratings and DBRS Morningstar both have views skewed toward potential upgrades in due course.
Separately last Friday, Scope Ratings, one of five such credit assessors whose measures are used to gauge collateral at the European Central Bank, kept Italy at its own score of BBB+, three levels above junk.
Investors have also offered applause to Meloni’s government.
The spread between Italian 10-year bond yields and those of Germany, a measure of risk in the region, traded around 100 basis points last week, less than half of the level it reached when the premier first took power in 2022.
Italy remains beset by challenges that no doubt still focus analysts at Moody’s. Debt remains well in excess of 130% of gross domestic product, and the European Commission this week predicted it will edge up in coming years.
The affirmation of the current rating level “captures Italy’s high debt burden which – coupled with a gradual weakening debt affordability and structural challenges related to its population ageing – remains a constraint on its credit profile,” Moody’s said.
The economy meanwhile is struggling to build momentum.
The government was forced to cut its outlook for growth this year to 0.6%, down from a target of 1.2%.
Even so, the downbeat assessment of Moody’s had stood out, and was a thorn in the side of Meloni at the onset of her premiership.
Its shift to a negative outlook in August 2022 cast a shadow over the election she won just weeks later, and the company only lifted the imminent threat of a downgrade the following year.
The prospect of an upgrade now puts the onus on Meloni’s government to reach the narrower deficit that it has promised in the hope that delivery will make the difference.
The last time the budget shortfall was below 3%, as is projected for 2026, was before the pandemic.
Achieving that will be more difficult than before because the country’s export dependence leaves it vulnerable to global trade tensions, hurting economic growth, while the need to raise defense spending to beef up Europe’s military deterrence against Russia is another pressure Meloni hadn’t banked on. — Bloomberg
