(Bloomberg) -- The outlook on Italy’s credit status was raised by Fitch Ratings, an unexpected win for Prime Minister Giorgia Meloni.
The rating company maintained Italy’s BBB status — two notches above junk — but changed its view on what might happen next to “positive,” citing the country’s “recent stronger fiscal performance and commitment to EU fiscal rules.”
Those elements “point to a potential reduction in medium-term fiscal and financing risks stemming from Italy’s exceptionally high debt levels,” it said in a statement late Friday.
The euro zone’s third-biggest economy also got a pass from S&P Global Ratings, which confirmed its BBB ranking and kept its outlook stable. That signals it isn’t in imminent danger of a downgrade. Other credit-rating reviews are expected later this month and in November.
Italy’s Timetable
The decisions come just days after Meloni’s cabinet approved Italy’s 2025 budget and confirmed ambitious fiscal targets that see deficit-to-economic output falling below the European Union’s 3% limit by 2026. Still, the country’s mammoth debt, which remains above 130% of output, is set to expand and won’t start decreasing until 2027, according to the government’s own estimates.
Meloni’s coalition has tried to pursue some fiscal restraint, but high borrowing costs and weak economic growth, along with the legacy of a pandemic-era home-renovation tax break called superbonus, are all taking their toll. That latter initiative will bloat the country’s public finances for years to come.
Italy is among European Union members rebuked for exceeding the bloc’s 3% ceiling for budget deficits and now faces a monitoring regime that could lead to fines.
“We consider the risks of non-compliance to be limited, as Italy’s plans align with European Commission requirements under unchanged legislation,” Fitch said.
The spread between Italy and Germany’s 10-year bond yields — a measure of credit risk — is nearing the lowest level in three years. The nation’s notes have outperformed peers over the past year, in a sign that investors are buying into Meloni’s resolve to tame the budget deficits.
Last year, Moody’s Ratings even removed its threat of a downgrade to junk, and its outlook has stayed stable ever since.
--With assistance from Alice Gledhill.
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