The initial credit rating upgrade by Moody in 23 years has been a big milestone for Prime Minister Giorgia Meloni in Italy.
The rating has changed to Baa2, which has a stable outlook as compared to the Baa3 rating, which indicated that there was increasing confidence in the economic and fiscal reforms in Italy.
Moody points out reforms and political stability
Moody uses the history of political and policy stability in Italy as one of the reasons behind the upgrade. The agency observed that stable governance has facilitated economic reforms and investments in the National Recovery and Resilience Plan. Italy had also risked being downgraded to junk status on occasions when there were uncertainties in the politics, but the government in place has succeeded in reversing the trend.
The revision is a follow-up to the downgrade conducted by Moody in 2018 with the previous Prime Minister of Italy, Giuseppe Conte. The shrinkage was indicative of anxieties in the eurozone debt crisis. In 2022, Moody changed its opinion on Italy to negative in another sign of a future downgrade. The administration of Meloni, since she came to power, has aimed at balancing the public finances and budget deficit.
Budgetary initiatives and investor trust
Italy is working towards achieving the 3% GDP deficit limit set by the European Union this year. This target will enable the nation to get out of the EU surveillance regime on countries having fiscal imbalances. The government debt of Italy is expected by Moody to fall gradually after 2027.
Feelings of investors have also been enhanced. The yield difference between the 10-year bond yields of Italy and Germany has dropped to less than 80 basis points a huge improvement over three years ago. Finance Minister Giancarlo Giorgetti stressed that the upgrade is a sign of confidence in financial management in the government and improvement of the situation in the sphere of public finances.
Challenges and the future perspective
However, since the upgrade, the amount of public debt in Italy is still high at over 130% of the GDP, with a growth of only 0.5% expected this year. These aspects will be a challenge to Meloni and Giorgetti, especially when they will have to think ahead of the 2027 national elections in terms of tax cuts and fiscal policies. Striking a balance between expenditure and economic development and expectations of the voters will continue to be a sensitive exercise.
The upgrade of Moody in Italy is the fourth rating action by a large agency in the year. The credit rating agencies S&P Global Ratings and Fitch Ratings had already increased the credit scores of Italy in the past, and smaller rating agencies had also portrayed positive changes. Although the country has been slightly below its G7 counterparts, the recent rating is an indication of a stabilizing economy and reserved optimism among the investors.
