Italy secures first Moody’s upgrade in two decades

Italy recently received its first upgrade from Moody’s Ratings in over 23 years, marking a significant achievement for the country’s Prime Minister, Giorgia Meloni. With this move, the country has managed to put an end to a period when it was on the verge of being viewed as junk.

News of Italy’s first upgrade leak emerged after reports dated Friday, November 21, revealed that the country’s lowest credit rating among the Group of Seven countries had improved by one level to Baa2. Notably, the outlook for this rating is now stable.

Moody’s explained in the report that “the rating upgrade shows a steady record of political and policy stability, which boosts the success of economic and fiscal reforms along with investments made under the National Recovery and Resilience Plan.” 

Italy celebrates a major achievement after receiving its first Moody’s upgrade since 2002

Moody’s was the last rating agency to make this change. They waited until Meloni entered her fourth year in office before finally raising the credit score to acknowledge Rome’s efforts to fix public finances during an unusual time of political stability. 

This move was adopted after Moody’s downgraded Italy to Baa3, the last level of investment grade, in late 2018,  while Giuseppe Conte was Prime Minister. This downgrade was part of a series of cuts that began during the eurozone’s sovereign debt crisis. 

In August 2022, Moody’s changed its view on the euro zone’s third-largest economy, indicating a potential downgrade to junk status by moving its outlook to negative. Shortly after, Meloni took office, and the threat of a downgrade loomed over her first year until Moody’s reversed its decision in late 2023. 

Since then, her government has worked hard to stabilize the region’s second-largest debt and aims to reduce Italy’s budget deficit to meet the European Union’s limit of 3% of output as early as this year. If successful, Italy could exit the EU’s monitoring system for countries with fiscal issues. 

According to Moody’s, Italy’s high government debt burden is expected to decline gradually from 2027 onwards. Meanwhile, it is worth noting that this change by Moody’s is the fourth made by a credit rating agency this year; however, it still places Italy one level below its competitors. 

S&P Global Ratings, on the other hand, upgraded Italy in April without first changing its outlook to positive, while Fitch Ratings improved its score in September this year.

Meloni notes a significant issue as she considers a possible tax cut 

Smaller competitors have made significant strides: last month, Morningstar DBRS awarded Italy its highest rating in seven years, while Scope Ratings hinted at a similar upgrade in the future. 

Finance Minister Giancarlo Giorgetti commented on Moody’s upgrade, emphasizing Italy’s financial efforts. According to Giorgetti, the country’s financial efforts demonstrate that Italy has confidence in this government and it is making progress.

Investors are also changing their opinions about Italy. The gap between its 10-year bond yields and Germany’s—an indicator of regional risk—has dropped to below 80 basis points, which is less than one-third of what it was when Meloni took office three years ago. 

However, achieving further improvements in Italy’s public finances may be challenging, as the debt remains over 130% of economic output, and growth is expected to be just 0.5% this year, according to the government’s own estimates. 

This will pose a challenge for Meloni and Giorgetti as they attempt to balance pleasing voters with potential tax cuts for businesses and families ahead of the national elections in 2027, while still being cautious with spending.