Possibly for the first time in 23 years! Moody's expected to upgrade Italy's sovereign rating, boosting market confidence in public finances.

Analysts say that Moody's assessment of Italy on Friday could bring the first rating upgrade in nearly 23 years, reflecting increased market confidence in the public finances of the Eurozone's third-largest economy. The agency upgraded Italy's outlook from stable to positive in May, while maintaining the rating at "Baa3" (the lowest investment-grade level), citing stronger-than-expected fiscal performance and a more stable political environment. Since then, the government led by Giorgia Meloni has lowered the budget deficit target for 2025 to 3% of GDP, a year earlier than the EU's limit, due to increased tax revenue and lower debt repayment costs. A Citigroup analyst wrote in a weekly report, "Italy's fiscal performance continues to exceed expectations, benefiting from the unwinding of large-scale fiscal stimulus measures, robust GDP growth with rich employment and tax revenue, and fiscal support from the EU. Positive fundamentals have yet to be reflected in the ratings, which remain close to the levels of 2015-16." Moody's has not upgraded Italy's rating since the upgrade from Aa3 to Aa2 in May 2002. Since the downgrade in October 2018, the rating has not changed. The agency's positive actions will bring a satisfactory conclusion to Italy's rating upgrade in the autumn assessment cycle. Previously, Fitch upgraded its rating to BBB+, Deloitte elevated it to A (low), and Scope raised Italy's BBB+ rating outlook from stable to positive. S&P Global remains the only agency that has not made adjustments, confirming Italy's sovereign rating as BBB+ with a stable outlook. Just six months ago, the agency had upgraded its rating. Italian bond prices have surged as a result: the spread between 10-year Italian bonds and safe-haven German bonds (a key indicator of the additional return investors demand for holding Italian bonds) has narrowed by about 40 basis points since early September, currently around 75 basis points, close to a 15-year low. Analysts at Intesa Sanpaolo believe the possibility of an Italian rating upgrade on Friday is 60%, and they point out that Moody's decision in October not to downgrade France's rating, but only to adjust the outlook to negative, "may be interpreted as a signal to support a positive rating action for Italy." However, Italy still faces many challenges. With an aging population and a heavy debt burden, long-term sustainability is under pressure, while global trade tensions add uncertainty to its already weak economic growth. Italy's GDP stagnated in the third quarter, after declining by 0.1% in the second quarter. The Italian government lowered its full-year economic growth forecast to just 0.5% last month, compared to 0.7% growth for the entire year last year. Yet, rating agencies and markets are currently focusing on the positive aspects and acknowledging Italy's government fiscal discipline and political stability, with the Meloni government still popular after three years in power.