Italy's Sovereign Credit Rating Under Review by Moody's

Moody's Investors Service is set to review Italy's sovereign credit rating on Friday, sparking concerns that the country could be downgraded to junk status.

Previously, Moody's had given Italy a Baa3 rating with a negative outlook - the lowest investment-grade rating possible. Italian Prime Minister Giorgia Meloni recently presented a budget that adopts a more relaxed fiscal stance, including cuts to payroll taxes.

Italy currently holds the second-highest debt-to-GDP ratio in the eurozone, after Greece, standing at 141.7 at the end of 2022. This figure is significantly higher than the European Union average of 83.5.

Unfortunately, Italy's path to alleviating its debt burden seems uncertain. Fitch, for example, predicts only a modest increase in GDP growth, reaching 1% in 2024 and 1.3% in 2025, mainly driven by NextGenerationEU spending.

Nonetheless, other rating agencies have recently upheld Italy's investment-grade status. In fact, S&P and Fitch both rate Italy at BBB, which is the second-lowest investment-grade rating.

Deutsche Bank analysts warn that if Moody's were to downgrade Italy, it would lead to the widest divergence of opinions among agencies since Ireland faced a similar situation almost ten years ago. It is worth noting that Moody's takes a stricter approach with Portugal and Spain, and it recently assigned a negative outlook to the U.S.

Currently, the market does not appear overly concerned. The yield spread between Italian and German 10-year bonds stood at 179 basis points on Thursday, which is considerably narrower than the 206.3 basis points recorded in early October, as reported by Tradeweb.

It remains to be seen how Moody's assessment will impact Italy's credit rating and the subsequent implications for its economy.