Fitch Investors Service has confirmed Italy’s rating at BBB with a stable outlook, as already stated by Standard & Poor’s.
This decision has provided a certain degree of reassurance to investors, but the situation remains pending as we await evaluations from other major credit rating agencies. The judgment of Moody’s on November 17 is even more feared; this date will be crucial for Italy’s financial fate. Indeed, already in April, Moody’s had highlighted the risk that Italy could lose its “investment grade” status and slip into the risky territory of “junk” bonds. This possibility would have immediate repercussions on financial markets and the cost of financing Italian public debt.
What is the rating?
The public debt rating represents an analysis of a country’s solvency and credibility in repaying its debts and associated interest over time. It is assigned by independent rating agencies such as Standard & Poor’s, Fitch, and Moody’s and is essential for assessing the risk associated with purchasing government securities issued by a particular country.
These agencies assess a range of economic, financial, and political factors, including the debt-to-GDP ratio, economic growth potential, fiscal policy, political stability, and other macroeconomic indicators.
A high rating indicates greater confidence in the issuing country and lower risk for investors, while a lower rating suggests increased uncertainty and a higher risk of insolvency.
Public debt rating assessments, or downgrades, can thus directly impact the yields of government securities and investor confidence in both domestic and international financial markets.
The “positive” outcome for Italy
The rating of Italy is supported by its large, diversified,
and high value-added economy, its membership in the Eurozone, and the strength
of its institutions compared to the median of the peer group.”
– Nota dell’agenzia di rating Fitch
The positive outcome for Italy should not divert attention from the main risk factors weighing on the Italian economy: a very high public debt, a relatively lenient fiscal policy following the pandemic, and a reduced potential for economic growth.
In the first eight months of 2023, public debt increased by 10.4 billion euros per month, reaching a total of 2,840 billion euros by August 2023. Until 2026, as stated in the Update to the Economic and Financial Document (NaDEF), Italy will maintain a “stable” ratio between its public debt and GDP, which will hover around 140%.
Such a high level of indebtedness becomes a point of weakness for the country, reducing maneuvering room to address potential adverse events and increasing the cost of debt not only for the public sector but also for private entities.
Moreover, central banks may choose to prolong the maintenance of higher interest rates, exerting further pressure on the yields of Italian government securities and on the financing of national debt.
This situation, in addition to negatively impacting the competitiveness of the entire Italian economy, necessitates prudent management of public finances to mitigate the risk of financial instability and promote sustainable long-term growth.
GDP Forecasts
According to the rating agencies Standard & Poor’s and Fitch, a deceleration of Italian economic growth is predicted in 2023 and 2024. On the other hand, the Bank of Italy projects a GDP growth of 0.8%, with downside risks, for 2024—a significantly more cautious estimate compared to the optimism expressed by the government. Meanwhile, in their official assessments, both Standard & Poor’s and Fitch outline a more robust recovery perspective in 2025, estimating growth around 1.3%.
Prospects for GDP and careful monitoring of public debt will be key elements to understand and address the challenges that Italy will face in the coming years.
Return to the European Stability Pact
Starting from 2020, to address the economic consequences of the pandemic, Europe temporarily suspended budget constraints, waiving the 3% parameters in the deficit/GDP ratio and the 60% parameters in the debt/GDP ratio. In response to the pandemic crisis, Italy increased public spending and indebtedness, which already significantly exceeded the limits imposed by European constraints.
The granted derogation and the purchases of Italian public debt securities by the European Central Bank at substantially low rates have allowed the Italian system to maintain a certain stability, despite the real economy going through a phase of increasing weakness and uncertainty. However, starting from the fall of 2021, interest rates began to rise in an attempt to counter speculative inflation, leading to a rapid reduction in the purchase of securities by the ECB, almost coming to a complete halt.
In January 2024, European constraints will be applied again, thus ending the derogation granted in 2020 and forcing Italy to adopt concrete measures to counter the increase in debt.
And savers?
In this economic and financial scenario, marked by a decrease in funding for social services and a revision of pension benefits, what should be the strategic approach for savers?
Not limiting oneself to the simple accumulation of resources and capital, but adopting a protection-oriented perspective through a diversification strategy.
This prudence is not limited solely to a balanced distribution among various asset classes but also extends to geographic diversification. In an interconnected and constantly evolving world, economic challenges can manifest in different ways in different regions.
Therefore, to mitigate risk and protect investments from potential turbulence, it is crucial to broaden the investment horizon through strategic geographic distribution.
Diversifying among assets and geography not only provides broader coverage against market fluctuations but also contributes to creating a more resilient portfolio adaptable to changing national and global economic conditions.