Economy

Italy Credit Rating Slashed Toward Junk

Douglas A. McIntyre

Italy, suffering from one of the highest COVID-19 death rates in the world, crushing sovereign debt and a collapsing economy, took another blow as rating agency Fitch cut its credit rating to just above junk status.

According to the agency, which cut the rating to BBB−:

The downgrade reflects the significant impact of the global COVID-19 pandemic on Italy’s economy and the sovereign’s fiscal position. Fitch forecasts an 8% GDP contraction in 2020 and the risks to this baseline forecast are tilted to the downside, as it assumes that the coronavirus can be contained in 2H20, leading to a relatively strong economic recovery in 2021. 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.

The gross general government debt (GGGD) to GDP ratio will increase by around 20pp this year. Our baseline GGGD forecast is 156% of GDP by at the end of 2020, compared with the ‘BBB’ current median of 36% of GDP. According to our baseline debt dynamics scenario, the GGGD to GDP ratio will only stabilise at this very high level over the medium term, underlining debt sustainability risks.