S&P Affirmed Italy’s Rating To BBB And Surprised With An Upward Revision Of The Outlook From Negative To Stable

Annalisa Piazza MFS Investment Management | There are four major factors behind the upward revision in the outlook:

-Potential growth will benefit from the Recovery Fund in the medium term,

-The European Central Bank (ECB) will continue with its QE programme in the medium term which means that no abrupt swings in the service of debt are anticipated,

-The government has shown more stability and it is more in line with the EC direction of travelling,

-The service of debt is so low that it increases chances of returning to a more sustainable debt trajectory in the medium term.

The upward revision in the outlook is a welcome surprise at times where rating agencies need to calibrate the short impact of Covid-19 on public finance and more medium term opportunities.

There are still a lot of risks around Italy in the medium term and we would be surprised if all projects and plans were implemented smoothly, on top of the most recent restrictions for renewed spike in Covid-19 cases.

That said, the S&P move reduces near term risks of Italy falling below investment grade that would have had implications on BTPs holdings by real money accounts and market pricing, somehow challenging the ECB efforts to keep financing conditions under control.