Speciale Financial Times

After Moody's judgement, more room for maneuver for the Meloni government

Italian government bonds rose sharply on Monday after Rome avoided a possible downgrade of its credit rating to "junk", giving a boost to Prime Minister Giorgia Meloni's centre-right coalition government.
Moody's affirmed the country's investment grade rating in a scheduled upgrade after markets closed on Friday and raised its outlook for the country's debt from negative to stable.
The resulting rally in Italian bonds pushed 10-year yields down 0.04 percentage points to 4.32%, the lowest level since early September.
The spread between Italian and German 10-year bond yields, a gauge of perceived risk in Italian debt, narrowed to just over 1.7 percentage points on Monday morning, the lowest level since late September.
The spread – which is seen as an indicator of stress in European financial markets – had risen above 2 percentage points in October on concerns about Italy's growing budget deficit plans and its weakening economic growth.
Moody's cited the "stabilizing outlook for the country's economic strength, the health of its banking sector and the dynamics of public debt" as it chose not to become the first of the major rating agencies to strip Rome of investment grade status.
The agency also expressed optimism that Italy's medium-term growth will be supported by the implementation of its €200 billion EU-funded post-pandemic reform and investment programme, despite Rome's proposal to considerable program revisions.
Moody's rates Italy's sovereign debt at Baa3, one level above junk, and lowered the outlook to negative in August 2022 after the unexpected collapse of a unity government led by Mario Draghi, the former president of the Bank Central European Union, sent the country to early elections.
However, since taking power just over a year ago, Meloni has sought to reassure international investors that her right-wing coalition would be responsible stewards of the Italian economy and would pursue fiscally prudent policies as it took distancing itself from its past populist and anti-EU rhetoric.
Moody's restoration of a stable outlook for Italy is a welcome boost for Rome at a time when it grapples with weakening European growth and much higher borrowing costs following a cycle of rate hikes of interest to fight inflation.
“It is incredibly good news for the Meloni government as it creates a lot of room for maneuver for her politically and economically,” said Mujtaba Rahman, managing director in Europe of Eurasia Group, a consultancy, Giancarlo Giorgetti, minister of Italian Finance, said that the decision is “confirmation that, despite many difficulties, we are working well for the future of Italy”.
Citigroup analysts predicted, in a note to clients on Monday, that the spread between Italian and German bond yields will "narrow following the decision" by Moody's "and then stabilize in December" when the Italian government reduces bond issuance.
The lower cost of money in Italy would also benefit Italian banks, Citi analysts said, by reducing financing costs.
Italy's public debt has risen above 140% of its gross domestic product – the second highest level in the EU after Greece – driven by increased spending to deal with the fallout from the coronavirus pandemic and the energy crisis caused by the invasion Russian from Ukraine.
Meanwhile, the country's economic recovery from these shocks has lost momentum this year, with third-quarter GDP flattening from the previous quarter and compared to a year ago.
However, the outlook for Italy has recently improved thanks to a sharp decline in inflation, which fell to its lowest level in more than two years in October, combined with growing investor hopes that the ECB may start cutting interest rates.
interest as early as next spring.
The central bank has also supported Italy's bond markets by maintaining reinvestments in a 1.7 trillion euro portfolio made up mostly of government debt that it began buying in response to the pandemic, despite calls from some politicians to end the practice before the end of next year.
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