S&P Affirms Italy's BBB Rating, Expects Debt-to-GDP Ratio to Rise

S&P Global Ratings has confirmed Italy's BBB credit rating with a stable outlook, despite expecting the country's debt-to-GDP ratio to increase by 2.5 percentage points over the next two years. The rise in debt is attributed to past tax credits, particularly from construction bonuses.

However, S&P expects Italy's economic growth to be around 1% annually, and the implementation of the National Recovery and Resilience Plan (PNRR) is seen as supporting the outlook. The decline in Italy's deficit over the last three years has been faster than anticipated, but the change in direction is due to the debt legacy from the use of tax credits.

Why this matters: Italy's credit rating and economic outlook have significant implications for the country's financial stability and borrowing costs. The upcoming assessments by Fitch and Moody's will be closely watched, as any changes in Italy's rating could impact its financial markets and overall economic performance.

The real judgments on Italy's public finances will come in the autumn ratings round, as the government will have to reveal its plans and agree with the EU Commission on a structural fiscal plan to repay the debt over a 7-year horizon. Italy is expected to publish its structural fiscal plan and debt repayment plan with the EU Commission in September, which will provide more clarity on the country's fiscal path forward.

The International Monetary Fund (IMF) has also provided recommendations for Italy, France, and Germany regarding fiscal policy and debt management. The IMF has advised Italy and France to implement more significant and front-loaded fiscal consolidation, while suggesting that Germany has fiscal space to invest in digitalization, public infrastructure, and support for companies' research and development.

Despite concerns over Italy's public finances, with the budget deficit standing at 7.2% of GDP in 2022, more than double the estimated average for the Eurozone, the yield spread between Italian and German bonds has narrowed to a 26-month low. This narrowing is driven mainly by interest rate expectations and European Central Bank policy rather than Italy's economic fundamentals.

The confirmation of Italy's BBB rating with a stable outlook suggests that S&P Global Ratings believes the country is maintaining its economic and financial stability. However, analysts warn that Italy's bond rally is likely to peter out in the second half of the year due to a worsening outlook for growth and public debt. Italy still faces structural issues that need to be addressed to secure a higher rating in the future.

Key Takeaways

• S&P confirms Italy's BBB credit rating with stable outlook despite rising debt.
• Italy's economic growth expected at 1% annually, PNRR implementation supports outlook.
• Italy's fiscal plan and debt repayment strategy to be revealed in September.
• IMF urges Italy and France to implement more fiscal consolidation, Germany to invest.
• Italy's bond rally likely to slow due to growth and debt concerns, structural issues remain.