Italy exits Moody's junk danger zone in big win for PM Giorgia Meloni

By Alessandra Migliaccio

Italy is no longer in danger of a cut to junk at Moody’s Investors Service, which raised its rating outlook to stable in a huge win for Prime Minister Giorgia Meloni. 
 

The country’s assessment was kept at Baa3, the lowest investment grade, but the company removed the threat of a downgrade after more than 15 months with a negative view instituted just before the populist premier won power. 

 

The decision “reflects a stabilization of prospects for the country’s economic strength, the health of its banking sector and the government’s debt dynamics,” Moody’s said in a statement on Friday. “Medium-term cyclical economic prospects continue to be supported by the implementation of Italy’s National Recovery and Resilience Plan, and risks to energy supplies have abated.”

The change in outlook removes a sword of Damocles that has constantly overshadowed Meloni and her one-year-old coalition. It offers the premier a pay-off for her gamble in September to deliver on promises to voters with a loosened fiscal stance despite an intensified focus on the public finances by Moody’s. 

Her budget then sent the spread between bonds of Italy and Germany — a key measure of risk in the region — to 210 basis points for the first time since January. The gauge was at 177 on Friday. 

Finance Minister Giancarlo Giorgetti said the change in outlook at Moody’s filled him with “great satisfaction.”

“This confirms that even among many difficulties, we are doing the right things for Italy’s future,” he said in a statement to reporters.    

Moody’s baseline is that the general government fiscal deficit will total 4.4% of GDP in 2024. The rating agency forecasts debt-to-GDP will total 140.3% in 2023, down from 141.7% in 2022 but about 6 percentage points higher than it was before the pandemic.

Series of Assessments

The company’s scheduled update was the last in a series of such big assessments on Italy this year — and the most precarious, given its proximity to junk. Rivals have markedly more upbeat views, with both Fitch Ratings and S&P Global Ratings reaffirming stable investment-grade assessments one step higher.

The reprieve now buys time for the prime minister as she contends with a shaky economy, spending demands for voters and a fractious governing coalition. 

While Italy barely escaped a recession in the third quarter, prospects there may at least be improving. 

The economy isn’t expected to shrink through 2025 and should benefit significantly from European Union Recovery Fund spending in that time, according to European Commission forecasts released last week. 

Even so, that outlook also showed a less rosy outlook for the public finances than the government’s already loosened stance. 

The Commission sees the deficit narrowing to 4.3% in 2025 — a wider outcome than the 3.6% projected by Meloni’s officials. It also sees debt as a percentage of output rising above 140% in the next two years. 

Given that Moody’s has specified public finances as an area of concern, such a profile is likely to keep the rating company watching Italy closely. 

The prospect that the shortfall will still be noticeably above 3% two years from now could also prove a point of contention with the EU. Its regime limiting deficits to that ceiling will kick in again as of January. 

Finance ministers have yet to agree on a framework to interpret that rule, and may discuss the matter in coming days.