Fitch lowers Italy's rating outlook on fiscal plans of new government

The rating agency changed the nation’s credit outlook to negative from stable

Italian Economy Minister Giovanni Tria says Fitch “correctly withheld judgment” by maintaining the foreign long-term rating. Reuters

Italy’s rating outlook was lowered by Fitch Ratings, which said the fiscal plans of the new government risk a degree of fiscal loosening.

Fitch changed the nation’s credit outlook to negative from stable. The rating company, however, maintained its foreign long-term credit rating at BBB, a decision applauded by the Italian government and cited as proof of the credibility of its economic program.

“The risk of a reversal of structural reforms negatively impacting Italy’s credit fundamentals has increased somewhat, in our view,” Fitch said in a report on Friday. “Fiscal and other policy risks are compounded by the relatively high degree of political uncertainty.”

Concern about Italy’s budget has been an investor focus this summer, with bond yields pushed higher in response to the new populist government’s expensive electoral promises. Those include hefty tax cuts and some form of universal income for the poor that could have a negative impact on the country’s debt and deficit.

Fitch “correctly withheld judgment” by maintaining the foreign long-term rating, Finance Minister Giovanni Tria said during a trip to China, Ansa news agency reported. Government actions “in coming weeks” will convince agencies about Italy’s credit-worthiness.

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The final make-up of the government program has yet to be decided. On August 20, Moody’s Investors Service extended a review of Italy’s credit rating to get “better visibility” on the fiscal path and reform agenda.

The government is expected to set new public-finance and economic-growth targets by September 27 and submit a draft budget to the European Commission by October 15.

The Fitch decision to maintain the long-term rating unchanged was “fully justified” by the Italian economy, an official in the prime minister’s office said. The government is confident that future decisions on Italy’s creditworthiness will be positive and “without reservations,” due to indications already given on plans to reduce the country’s debt and promote growth.

Italy’s current targets, agreed with the EU, see the deficit falling from 1.6 per cent of the gross domestic product in 2018 to 0.8 per cent in 2019, with a balanced budget in 2020. Mr Tria told Bloomberg in July that his aim is not to worsen the structural-budget situation and possibly to improve it. Still, he’s also said that slower-than-expected economic growth means the deficit is heading toward 1.2 per cent in 2019.

Italy’s public debt, at 2.3 trillion euros ($2.7tn), is already the highest in the euro area after Greece. As a proportion of GDP, it’s forecast to be 130.8 per cent this year, and narrow to 128 per cent in 2019. Mr Tria has insisted that the government will keep working on the reduction of the debt ratio despite slower economic activity this year.