- The global background and Italy: if we wanted to characterise the contraction and recovery pattern, we would probably describe it as a ‘long U-shaped’ recovery; in other words, as a gradual normalisation which will take some time before seeing a return to pre-crisis levels. In Italy, the government is estimating an 8% GDP contraction this year, followed by a 4.7% YoY rebound in 2021. In our analysis, we consider two possible reference scenarios for 2020 growth: -8.0% YoY (as per the government scenario) and -12.0% YoY.
- Italy’s public finances: in the short term, the government is expecting a deficit worth 10.4% of GDP and a debt/GDP ratio at 155.7% in 2020, in line with our expectations. A more adverse growth profile, with a 12% YoY contraction this year, would lead to a 13% deficit-to-GDP ratio and a debt-to-GDP ratio around 165%. Based on government estimates, if the economy grows by 6.1% in nominal terms with a deficit worth 5.7%, the debt could fall to 152.7% of GDP in 2021. We could then assume nominal growth at 2.4% in 2022, with a return to a primary surplus of around 1.0%, allowing the deficit-to-GDP ratio to fall below 3% and the debt-to-GDP ratio to shrink by an extra percentage point.
- In the first four months of 2020, the primary market for Italian public debt has seen an intense level of activity: the volume of gross and net supply placed so far has already reached around 47% and 75% respectively of the targets set in January for the entire year. The progress made to date in terms of net proceeds is likely to strengthen the role of the ECB with its asset purchase programmes in covering new and much higher issuance volumes, which will be added to those already planned for over the coming months.
- We remain constructive on Italian public debt: In relative terms Italian yields are more attractive than those offered by other peripheral countries. The proposal by France and Germany to launch of a ‘health sovereignty strategy’ is an important step towards further integration in the Eurozone. The news was well received by the market, resulting in significant tightening of peripheral spreads, especially for Italy. This is likely to continue in the short term. The risk of Italian sovereign debt suffering a rating downgrade in the short term relates mainly to a possible move by S&P and Fitch, which both currently rate the country at an intermediate-level BBB rating, a notch above Moody’s (low BBB) with negative outlook, compared with a stable outlook for Moody’s. While S&P kept its previous assessment in its recent half-yearly review, in line with expectations, Fitch wasted no time in bringing forward its review -- originally scheduled in July -- and cut the rating by one notch to the same level as Moody’s, changing its outlook from negative to stable, also in line with Moody’s.