Italy : Chronicle of a downgrade foretold

The remainder of October will be crucial for Italy. After announcing deficit and growth forecasts that alarmed the markets, the government has to submit its draft budget to the European Commission on Monday October 15 th . But the most important events are the rating agencies’ decisions on the Italian sovereign, expected on October 26 th for S&P and by end-October for Moody’s. The 2019 budget will obviously be the core issue in the assessment of the Italian rating. The planned fiscal policy is very expansionary, and is based on growth assumptions that seem too optimistic. In this Special Report, we estimate the amount of the fiscal deficit and the public debt based on our growth forecast for Italy . With our growth scenario, the 2019 fiscal deficit would come in at a range of between -2.6% and -2.8% and would therefore exceed the government’s initial target, i.e. -2.4%. Moreover, it would not decrease in the following years and, as a result, debt will not start a downward trend. Given these results and the government’s confrontational tone with respect to its European commitments, the most likely outcome is a downgrading in Italy’s rating to BBB-, nevertheless with an outlook that probably will remain stable. In any case, even in a more positive scenario, the Italian spread is likely to remain high given the continuing uncertainties surrounding future developments in Italy.