Prime Minister Giorgia Meloni’s plan to delay a return to the region’s budget deficit limits leaves Italy more exposed to the application of European Central Bank policy, Scope Ratings said.
(Bloomberg) — Prime Minister Giorgia Meloni’s plan to delay a return to the region’s budget deficit limits leaves Italy more exposed to the application of European Central Bank policy, Scope Ratings said.
The Berlin-based credit assessment company suggested that higher interest rates, prospects for the wind-down of pandemic-era support, and eligibility for crisis aid are all now more acute pressure points for the country in the wake of the government’s looser fiscal outlook.
Aside from the impact of elevated borrowing costs, Italy could face a €50 billion ($52.8 billion) shortfall accounting for 10% of its 2025 financing needs if Frankfurt officials speed up an end to reinvestments in their pandemic-era emergency bond purchases next year, Scope said.
Meanwhile compliance with European Union-mandated fiscal restraint and reforms is important to ensure the country could benefit if needed from the ECB’s Transmission Protection Instrument crisis-fighting tool, analysts led by Giacomo Barisone wrote in the report.
“Downward revisions by the Italian government of the country’s economic growth and fiscal outlooks confirm our concern that Rome has a narrow path to consolidate public finances,” they said.
Italy’s borrowing costs will rise to 4.6% of gross domestic product by 2026, Scope said. That means the country needs a primary surplus — where revenue exceeds spending, minus interest — of at least 1.6% of output to meet the EU’s 3% of GDP deficit limit that is set to resume next year.
“The government’s goal to reach that level by 2026 requires ambitious fiscal consolidation,” Scope said.
The ratings company currently grades Italy as BBB+, three levels above junk, with a new assessment scheduled for Dec. 1. Its rival Moody’s Investors Service sees the country at the lowest investment-grade notch.
ECB Governing Council member Peter Kazimir suggested on Wednesday that officials should hold off any faster wind-down of pandemic-era support for now.
“We’re ready for debate, but we shouldn’t touch the buttons of reducing the balance sheet at a different pace,” he told reporters in Bratislava. “We’ll come to this topic only after we’re sure we won’t have to raise rates further.”
–With assistance from Alessandra Migliaccio.
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