DBRS boosts Italy’s ratings on resilient economy, expectations of stability in debt ratio

DBRS Morningstar upgraded Italy's credit rating to 'A low' from 'BBB high', citing significant improvements in the banking system and external accounts that have enhanced economic resilience, alongside expectations of fiscal consolidation stabilizing public debt. However, the agency noted that Italy's rating remains constrained by its very high public debt, projected to reach 136.2% of GDP this year, a large and rising interest burden, and potential weak GDP growth, with recent estimates trimmed to 0.5% and 0.7% for this year and next. As a result, DBRS revised the trend on all long-term ratings from 'positive' to 'stable'.

Analysis

DBRS Morningstar upgraded Italy's credit rating to 'A low' from 'BBB high', citing significant improvements in the banking system and external accounts that have enhanced economic resilience. This upgrade also reflects expectations that ongoing fiscal consolidation efforts will contribute to stabilizing the nation's public debt ratio. The agency noted a reduction in structural weaknesses since its 2017 downgrade.

Despite the upgrade, DBRS highlighted persistent constraints, including Italy's very high public debt, projected to reach 136.2% of GDP this year and 137.4% by 2026, alongside a large and rising interest burden. The euro zone's third-largest economy contracted by 0.1% in Q2, leading to trimmed GDP growth estimates of 0.5% for 2024 and 0.7% for 2025, partly due to US trade tariffs.

DBRS acknowledged the credibility of Italy's medium-term fiscal consolidation plan, supported by the government's track record, despite slower growth momentum and increasing spending pressures. However, the agency revised the trend on all long-term ratings from 'positive' to 'stable', indicating a balanced outlook where positive developments are offset by ongoing structural challenges.

Key Decisions for Investors

• Monitor Italian sovereign bonds for potential yield compression due to the upgrade, while remaining cognizant of the 'stable' outlook and high debt levels.
• Evaluate exposure to Italian financial institutions, considering the noted improvements in banking system resilience against the backdrop of potential weak GDP growth.
• Closely track Italy's actual public debt trajectory and GDP growth figures against government forecasts, as fiscal consolidation execution remains critical given trimmed growth estimates and rising interest burdens.