A few days after the start of the placement of the BTP Valore (6 May), a confirmation of the rating from Morningstar DBRS arrived for the Italian debt.
On 26 April – with the markets closed – the agency announced that the rating on Italian sovereign debt remains at BBB (high) with a stable trend (click here to find out about the rating methodology).
“The ‘stable’ trend reflects Morningstar DBRS’s view that risks to ratings are balanced,” it said in a note. “Italy’s recovery after the pandemic has been stronger than expected and has outpaced other large euro area economies. The effects of a more restrictive monetary policy and a weaker external context are weighing on economic activity, but a gradual recovery in growth is expected with the improvement in the purchasing power of families and in financial and external conditions”.
The effects of the super construction bonus
Analysts, however, place emphasis on the effects of the super construction bonus, which have translated into a fiscal deficit equal to 7.4% of the Gross Domestic Product (GDP) in 2023, well above the 5.3% expected by the government. They also point out that the debt-to-GDP ratio fell faster than expected last year thanks to economic growth. However, it remains high (137.3%) and with the prospect of it growing further between now and 2026 to reach 139.8%. We addressed this topic some time ago in an interview with the economist Antonio Mazziero, who spoke of “emergency” public accounts.
Morningstar DBRS specifies that “the probable extension of the temporary tax relief to 2024 could exert further pressure, if not accompanied by compensatory measures” and looks to September 20 when the government led by Giorgia Meloni will have to present the new structural fiscal budget plan to the European Commission in the medium term, in the context of the new fiscal rules. On this occasion, analysts say, Italy “will have to reconfirm its commitment to reducing the fiscal deficit”.
More government bonds to finance the debt
The fact remains that high public debt, the second highest in the European Union, makes Italy vulnerable to shocks. To finance it, the government must issue government bonds, which increases interest costs, especially in an environment where rates remain high.
“Gross issuances of Italian public debt are considerable, equal to approximately 24% of GDP on average over the last three years, and are expected to remain high in the future,” reads the Morningstar DBRS note. “Interest spending is estimated to reach 4.4% of GDP in 2027 due to large debt issuances in a high interest rate environment.” However, the fact that the average maturity of government bonds is seven years (as of March 2024) mitigates the increase in financing costs.
Small investors who have returned to buying government bonds also seem to have an important role, as evidenced by the success of the various BTP Valore issues in 2023 and in the current year. According to analysts, the impact on yields due to the reduction of positions in Italian government bonds by the European Central Bank (ECB) has been mitigated by greater demand from Italian families.
“Between June 2022 and December 2023, the increase in holdings of domestic households and businesses more than offset the increase in the stock of debt, a trend that Morningstar DBRS does not rule out continuing in light of the high amount of household deposits” , we read in the note from the rating agency.
Morningstar DBRS is a Morningstar group company.
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