Moody’s lowered Italy’s credit rating to Baa3, from Baa2, on notch above junk status. Also rating outlook was assigned as “stable”. The rating cut was generally expected and indeed, markets were calmed by the stable outlook.
Moody’s expressed concern over the budget deficit target of 2.4% of GDP in 2019, which is three times higher than prior target of 0.8%. The shift towards an expansionary fiscal policy would make “Italy vulnerable to future domestic or externally-sourced shocks, in particular to weaker economic growth.” Also, “most of the government’s spending increases are structural in nature, implying that they will be difficult to reverse,”
In addition, Moody’s warned that “the economic plans of the government, while supportive of growth in the near term, do not amount to a coherent program of reforms that will lift Italy’s mediocre growth performance on a sustained basis.”
Though, with a stable outlook, “Italy still exhibits important credit strengths that balance the weakening fiscal prospects.”
