Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or at minimum each six months in the cases of sovereign, sub-sovereign and supranational organisation issuers.

Scope performs monitoring reviews to determine whether material changes and/or changes in macroeconomic or financial-market conditions could have an impact on the credit ratings. Scope considers all available and relevant information when undertaking the monitoring review.

Monitoring reviews are conducted by performing a peer comparison, benchmarking against the rating-change drivers, and/or reviewing the credit’s performance over time, as deemed appropriate by the Lead Analyst or Analytical Team Head, in addition to an assessment of all aspects of the relevant methodology/ies, including key ratings assumptions and model(s). Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review of the Republic of Italy (BBB+/Stable; S-2/Stable) on 8 February 2022.

This monitoring note does not constitute a credit rating action, nor does it indicate the likelihood that Scope will conduct a credit rating action in the short term. Information about the latest credit rating action connected with this monitoring note along with the associated ratings history can be found on www.scoperatings.com.

Key rating factors

For the updated Rating Report accompanying this review, click here.

Italy’s BBB+ long-term ratings account for multiple credit strengths such as a systemic economic and financial-system relevance of Italy within the euro area and associated more elevated likelihood of additional contingent support from European institutions under stressed economic scenarios. Furthermore, a strong external sector, moderate non-financial private sector debt ratios and enhanced financial-system cushions support resilience and bolster an outlook as regards sustainable recovery. The ratings acknowledge, furthermore, determined European institutional support since the Covid-19 crisis, in the form of monetary policy measures, including ECB asset purchases programmes and relaxation of collateral framework requirements, alongside EU fiscal support, after endorsement of a EUR 191.5bn Recovery and Resilience Plan (9.8% of average 2021-26 GDP) allocated to Italy, bolstering debt sustainability and creating extra fiscal space in support of long-run economic growth. Next, ratings are anchored by near-term political stability and momentum behind a credible structural reform, under an extended Mario Draghi public administration, aimed at addressing the investment gap and countering critical structural economic bottlenecks. The markedly pro-EU stance of the current government underpins expectation (at minimum until 2023 elections) of continued strengthened cooperation with European institutions and a closer alignment of near-term European institutional reform priorities with Italy’s economic interests.

On the other hand, Italy’s ratings are challenged by a very high government debt stock and related elevated annual gross government financing needs, which are expected to continue increasing structurally over the long run (through the cycle) – presenting to the government potential refinancing risk as markets continue reappraisal of risk relevant especially to vulnerable sovereigns under conditions of elevated inflation and monetary normalisation steps being undertaken. In addition, Italy’s credit ratings are constrained via longer-run economic bottlenecks, such as a rapidly ageing population, an historically weak track record of productivity (growth), and low employment and labour-force participation rates, which trim real and nominal growth and impair debt sustainability.

The Stable Outlook represents Scope’s opinion that risks to the sovereign ratings are balanced.

The ratings/Outlooks could be upgraded if, individually or collectively: i) debt-to-GDP remains on a meaningful downward trajectory; and/or ii) effective implementation of public investment priorities and a structural reform programme results in marked further increase in the long-run nominal growth of the Italian economy.

Conversely, the ratings/Outlooks could be downgraded if, individually or collectively: i) support from European institutions weakens after this current Covid-19 economic crisis, exposing Italy’s elevated debt stock to enhanced refinancing risk and/or questioning the timely support of European institutions under adverse scenarios; ii) a material weakening in the outlook regarding debt sustainability occurs; and/or iii) the nominal growth outlook weakens significantly.

The methodology applicable for the reviewed rating(s) and/or rating Outlook(s) (Sovereign Ratings, 8 October 2021) is available on https://www.scoperatings.com/#!methodology/list.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Dennis Shen, Director.

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