Last week Moody’s gave a shock to the U.S. Will it deliver a jolt to Italy?

Italy’s sovereign credit rating is due for a review by Moody’s Investors Service on Friday, with the possibility that the eurozone’s third-largest economy could get downgraded to junk.

Moody’s last rated Italy Baa3 with a negative outlook, the lowest possible investment-grade rating. And in September, Italian Prime Minister Giorgia Meloni rolled out a budget with a looser fiscal stance that includes payroll tax cuts.

Italy’s debt-to-GDP ratio is the second highest in the eurozone, behind only Greece, at 141.7 at the end of 2022, and way above the European Union average of 83.5.

And the Group of Seven member is not likely to grow itself out of the debt burden anytime soon. Fitch, for instance, only forecasts a modest pickup in GDP growth, to 1% in 2024 and 1.3% in 2025, from the acceleration of NextGenerationEU spending.

That said, the other rating agencies over the last month have affirmed Italy at investment grade, and in fact S&P and Fitch have Italy at BBB, which is the second-lowest investment-grade rating.

According to Deutsche Bank, if Moody’s were to downgrade Italy, there would be the widest dispersion between agencies since Ireland nearly a decade ago. That said, Moody’s does have a stricter stance vs. the others on Portugal and Spain, and last Friday gave a negative outlook to the U.S.

The market is not overly concerned at the moment. The gap between the yields on Italian and German 10-year bonds, 179 basis points on Thursday, was as wide as 206.3 basis points in early October, according to Tradeweb.

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