Italy’s Debt Rating: Uncovering the Truth Behind BTPs Today

The Moment of Truth for Italy’s Public Debt Rating

The crucial moment has arrived for the rating of Italy’s public debt, particularly affecting BTPs (Buoni del Tesoro Poliennali) and the Meloni government.
The administration has been proudly highlighting the downward trend of the spread between the yields of Italian government bonds and the German Bunds.
Currently, the 10-year BTP-Bund spread is at its year’s minimum, continuing to decline over the past weeks, influenced by the ECB’s third rate cut announced recently.

However, the European Central Bank is not the only factor impacting BTPs and spreads.
The assessments made by rating agencies regarding Italy’s debt are crucial, and markets are eagerly awaiting today’s judgment from Fitch and S&P Global on Friday, October 18th.

Upcoming Ratings and Expectations

In the following weeks, additional ratings will be provided by DBRS, Moody’s, and Scope Ratings on October 25th, November 22nd, and November 29th, respectively.

Is there a possibility that Italy might be rewarded with potential upgrades from rating agencies? Some analysts believe this is indeed possible.
They suggest that the agencies could issue a positive outlook upgrade for BTPs, though any actual rating improvement might be less likely.

The Italian government, obliged by the new EU Stability and Growth Pact, aims to reduce the deficit-to-GDP ratio below 3% by 2026.
Yet, how can Italy be promoted when its debt-to-GDP ratio hovers near 140%, projected to only decrease from 2027 onwards?

Citi analysts express cautious optimism, stating an upward trajectory in ratings cannot be ruled out.
They see a positive outlook change as a more likely first step, with S&P Global leading the charge.

Insights from S&P Global

It is important to highlight that in April 2023, S&P Global confirmed Italy’s debt rating at “BBB,” maintaining a stable outlook.
Yet, they also forecasted a rise in the debt-to-GDP ratio between 2024 and 2025, reflecting a complex economic environment.

In its analyses, S&P emphasizes Italy’s strengths while acknowledging challenges.
Despite a promising economic recovery thanks to EU funds, doubts linger over the implementation of necessary reforms.
S&P indicates potential rating adjustments based on fiscal performance and economic growth.

Fitch’s Perspective

Fitch’s forthcoming judgment is anticipated following their last evaluation in May, also aligning with a stable outlook.
The agency cited Italy’s diversified economy and institutional robustness, yet highlighted the nation’s high public debt and recent fiscal deficits as significant concerns.

Fitch has indicated that a downgrade could occur if financial needs deviate substantially from established trajectories and stressed the importance of successfully executing the PNRR reforms.

Hope for a Future Upgrade

Both Fitch and S&P Global have not dismissed the potential for an upgrade, contingent on improved fiscal management and growth prospects.
As the government works to meet the EU’s fiscal targets, these steps could help lessen Fitch’s concerns regarding Italy’s ability to manage its debt.

As we wait for the upcoming evaluations, including insights from Moody’s in the weeks to follow, the outlook appears cautiously optimistic as the BTP-Bund spread tightens.
Positive news from rating agencies could further boost investor confidence, especially amongst Asian investors looking at Italian bonds.