(Bloomberg) -- Premier Giorgia Meloni’s plans to tame Italy’s deficit are looking convincing enough to pass an initial smell test from Fitch Ratings.
Ed Parker, the credit assessment company’s global head of sovereign and supranational research, gave a cautious welcome to the fiscal path projected by Rome officials — a trajectory that aims to bring the budget shortfall below the European Union limit of 3% of gross domestic product by 2026.
“Sentiment around Italy has become more positive,” he said in an interview in Frankfurt on Thursday. “On paper, it looks like they can deliver on their fiscal goals. But it actually needs to happen — Italy doesn’t have a great track record at bringing down debt.”
At a time when France faces intense scrutiny for its struggle to shrink deficits, the remarks illustrate how its southern neighbor is succeeding for now in persuading observers about the merits of its own efforts. Scope Ratings offered muted applause in a report this week, while raising questions over the longer-term debt path.
Investors are largely positive too, with the spread between Italy’s 10-year bonds and those of Germany — a key measure of risk in the region — having narrowed to 127 basis points on Friday, the lowest since July.
Fitch assesses Italy at two steps above junk, with a stable outlook. Parker suggested there’s no imminent danger of slippage there, and even held out the prospect of improvement one day if the country ultimately delivers.
“We don’t see very strong downward pressure on Italy’s credit ratings,” he said. “To see a positive rating action, we’d need more confidence that debt is on a sustainable downward course. If we see deficit targets being hit and debt coming down, that would give us some confidence that Italy is on an improving path.”
Those remarks further highlight just how the trajectory has shifted since Meloni took power in 2022, when the government was on the brink of a junk rating from Moody’s Ratings. It removed that threat in November 2023, and no major rival has worsened its formal view of the country under her watch.
Fitch is scheduled to release a potential update on Italy on Oct. 18. Parker pointed to four areas of longstanding weakness that weighed on the country’s assessment in the past.
“Banks are looking better than they used to, politics are more stable,” he said. “The budget deficit is narrowing, growth is coming along. But of course public finances remain difficult, and growth is still weak.”
What Bloomberg Economics Says...
“Deivering fiscal consolidation of 0.5% of GDP in each of the next seven years will be extremely challenging, especially in the context of the government’s costly campaign-trail pledges. Without an economic and fiscal revolution, debt is more likely to rise than fall in the medium term.”
—Simona Delle Chiaie, senior economist. For her ITALY INSIGHT, click here
The struggle to achieve meaningful expansion is a constant headache for Italy’s leaders. The economy is now set to miss the government’s target for growth this year following an accounting revision, Finance Minister Giancarlo Giorgetti said earlier this week.
--With assistance from Alexander Weber, Mark Schroers, Christoph Rauwald, Aline Oyamada, Alessandra Migliaccio and James Hirai.
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