Italy has achieved a historic milestone that financial markets have been anticipating for over twenty years. Moody’s Ratings delivered the country’s first credit upgrade since 2002, elevating Italy from the precipice of junk status to a more stable investment grade position. This momentous decision reflects Premier Giorgia Meloni’s successful fiscal consolidation efforts and represents a dramatic turnaround for Europe’s third-largest economy, which had faced persistent downgrades throughout multiple economic crises.
Political stability drives unprecedented fiscal transformation
A one-notch upgrade in Italy’s credit rating, coming from Baa3 to Baa2, represents the end of an era where Italy remained on the brink of a junk bond rating. This upgrade in Italy’s rating may be a symbol of a political and policy setup conducive to economic reforms and investment propelled by the National Recovery and Resilience Plan introduced in Italy. Italy’s Moody’s rating used to be lowered to Baa3, symbolizing the final stage in a series of continuous downgrades during Italy’s previous prime minister, Giuseppe Conte, in late 2018.
The change started with Moody’s when the rating agency altered its outlook in August 2022, with looming threats of a drastic change in a junk status rating, which overshadowed the first few months of ruling under Meloni’s government. Later in 2023, the rating agency reconsidered, appreciating Italy’s commitment to pursuing fiscal discipline and structural reforms. This is actually the fourth positive change from rating agencies alone within this year alone despite Italy being lowered by a notch when placed among other European nations.
The debt-reduction strategy focuses on fiscal consolidation
The Meloni administration has already made substantial progress in ensuring Europe’s second-largest debt vulnerability problem is brought under control and meets the European Union’s 3% deficit rule by the end of this year. This would see Italy leave the European Union’s overspending watchlist, a significant political and economic triumph for Italy. Finance Minister Giancarlo Giorgetti argued the upgrade is a recognition of Italy’s full fiscal rectitude commitments and shows that international confidence is renewed.
Moody’s sees Italy’s high level of public debt decreasing gradually from 2027, although the rating agency assumes that public debt will remain high and become increasingly vulnerable due to higher financing costs associated with rising interest rates. According to Moody’s, debt levels will peak just above 130% of Italy’s GDP by 2034, against an estimated level of 136.5% for 2016, showing significant progress on the road to fiscal sustainability.
Investor confidence reflects improved risk perception
The bond market indicator shows a dramatic increase in market sentiment with the spread opening below 80 basis points between Italian 10-year yields and German counterparts. This is just a third of what it was three years ago, when Meloni took office, with a significant reduction in risks being highlighted. Italy’s Treasury Head Riccardo Barbieri conceded with caution about the debt level’s constraint in rating improvement, stating a reversal of a ‘four-decade erosion of Italy’s rating’ with success being established in it.
Economic troubles remain despite rating success
However, achieving future improvements within Italy’s public finances may increasingly be a challenge, especially with a debt level above 130% of GDP and growth rates being only 0.5% for this year, according to government projections. This will make it increasingly tough for both Meloni and Giorgetti to maintain their balancing act while satisfying their voters with a potential cut in taxes and their commitment to fiscal discipline ahead of the 2027 elections.
Italy’s historical credit upgrade is a remarkable change from a period of unstable finances, especially during times of political crises under its previous governments. Although major challenges exist with regard to Italy’s debt sustainability and economic growth performance, Italy has demonstrated an ability to make the international community regain confidence in its political and financial administrations under the new prime minister, Meloni’s, control.
