Fitch downgraded Italy’s credit rating from ‘BBB’ to ‘BBB-’, just one level above its junk rating, reflecting increasing doubts around Italy’s credit-worthiness as it tries to recover from the economic and societal damage inflicted by the coronavirus.
The ratings agency said the downgrade reflects “the significant impact of the global COVID-19 pandemic on Italy’s economy and the sovereign’s fiscal position.”
Fitch forecast that Italy’s economy will contract by 8% in 2020 and said the risks to this baseline forecast are tilted to the downside, as it assumes that the coronavirus can be contained in the second half of the year, leading to a relatively strong economic recovery 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.
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 of Italy’s creditworthiness was not scheduled (its next review is due in July) but was taken, 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 Italian economy was already in a weak position when the COVID-19 shock hit the country hard 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.
The ratings agency put a stable outlook on its latest Italy rating, saying that it partly reflects its view that the 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 at least over the near term.
“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.
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 but it has tentatively started to lift its lockdown with some smaller stores, such as stationers and booksellers, already allowed to reopen although generally the quarantine and travel restrictions, first imposed in early March, remain in place until May 3.
On Sunday, Italian Prime Minister Giuseppe Conte outlined further steps, or its “phase 2” for lifting the lockdown, saying that parks, companies and factories will be allowed to reopen from May 4 as long as social distancing measures are in place; bars and restaurants can also provide a takeaway service from then and on May 18, museums could re-open. Schools will stay closed until September, however.