Italy credit rating detracted to one notch above junk level by Fitch

Italy credit rating detracted to one notch above junk level by Fitch

Italy’s credit rating has been downgraded to a nick above junk level by Fitch rating agency as the coronavirus pandemic has left the economy gasping for air.

Fitch downgraded Italy’s credit rating from ‘BBB’ to ‘BBB-’, just one level above its junk rating, putting hopes to rest of fully recovering from the economic and societal damage inflicted by the coronavirus.

Fitch forecast that Italy’s economy will contract by 8% in 2020 and said the risks to this baseline forecast is in contrast with the financial analysis of a rebound in 2021. But “in the event of a second wave of infections and the widespread resumption of lockdown measures, economic outturns would be weaker for 2020 and 2021,” Fitch warned.

Debt sustainability risks

The ratings agency believes that Italy’s debt to GDP ratio will increase by around 20 percentage points this year to 156% of GDP by at the end of 2020. Italy is one of the most indebted nations in the world after Japan and Greece.

According to Fitch’s baseline debt dynamics scenario, the debt-to-GDP ratio “will only stabilize at this very high level over the medium term, underlining debt sustainability risks.”

Fitch’s appraisal does not leave a window for the benefit of the doubt even though Italy’s creditworthiness was not scheduled.

 Fitch said, because “situations where there is a material change in the creditworthiness of the issuer.

 we believe makes it inappropriate for us to wait until the next scheduled review date.”

The trajectory of Italy’s economic gloom was before the COVID-19 shock in February, making it the epicenter of Europe’s coronavirus outbreak.

 Real GDP grew by only 0.3% in 2019, Fitch noted, adding that the economy has effectively stagnated over the past two years.

What policies can be implemented to turn the ailing economy around?

The ratings agency put a stable outlook on its latest Italy rating, considering that European Central Bank’s net asset purchases will facilitate Italy’s substantial fiscal response to the COVID-19 pandemic and ease refinancing risks by keeping borrowing costs at very low levels.

However, the rating agency predicts a downward spiral if fiscal strategies to fuel confidence in the economy are negated.

 “Nevertheless, downward pressure on the rating could resume if the government does not implement a credible economic growth and fiscal strategy that enhances confidence that general government debt/GDP will be placed on a downward path over time,” the ratings agency said.

Keynotes:

The coronavirus outbreak has devastated Italy’s already frail economy, disrupting supply chains and hammering domestic and external demand. Moreover, it will exacerbate fragilities within the banking system and jeopardize fiscal sustainability.

 Risks of political instability and financial turmoil further cloud the outlook.

According to FocusEconomics panelists, Italy's economy is projected to plunge by 6.2% in 2020, which is down 6.4 percentage points from last month's forecast and to expand 3.9% in 2021.

Fighting Covid19 in Italy

Italy has recorded the highest death toll from the coronavirus so far in Europe, with 27,359 fatalities as of Tuesday, according to data from Johns Hopkins University.

It has over 200,000 confirmed cases of the virus