Fitch Ratings has changed the outlook for Italian debt on Friday from stable to negative, expressing concerns about the government’s populist character and its promises to rise public expenditure.
“We consider the downside risks to our fiscal forecast have increased since the last review in March. The latter is partly a function of the new and untested nature of the government, the sizeable policy differences between its coalition partners, and inconsistencies between the high cost of implementing new pledges as set out in its policy “contract” and its stated objective to reduce public debt.”
Fitch’s statement followed comments from a government official, who said Italy could exceed the EU budget ceiling if needed.
But following Fitch ratings, Italy’s economy minister said the government would respect European Union budget commitments and would address the concerns from ratings agencies like Fitch when taking certain political decisions.
“We have commitments with Europe that must be respected, but essentially because they are a function for financial markets,” Italy’s economy minister Giovanni Tria said.
If the coalition government fulfills what it pledged during its campaign, it would be increasing welfare spending and cutting taxes next year.
Italy’s €2.3trn debt makes the country vulnerable to weaken investors’ sentiment – representing more than 130% of Italy’s GDP – which, according Fitch’s forecasts, may fall “only slightly from 131.8% in 2017 to 130.4% in 2020”.
“This would leave Italy as one of the most highly indebted sovereigns rated by Fitch, and compares with the current “BBB” peer median of 37.8%”.