Fitch Upgrades Italy's Credit Rating Amid Political Stability and Fiscal Gains

By Giselda Vagnoni

ROME (Reuters) -Italy won a clear rating boost on Friday when Fitch upgraded the creditworthiness of the euro zone's third-largest economy reflecting the country's political stability and improving public finances under the government of Giorgia Meloni.

Fitch raised its Italy rating to 'BBB+' from 'BBB' and maintained its stable outlook, in line with analysts' expectations after upgrades last week to fellow peripheral euro zone countries Spain and Portugal.

"The current policy framework and stable political backdrop is conducive to Italy meeting its targets, with the new multi-year planning process serving as an important anchor in sustaining fiscal prudence," Fitch said.

The move highlights a swing in political fortunes in Europe. Last week Fitch cut its rating for France, the bloc's second-biggest economy, which is in turmoil as minority governments are toppled one after another as they try to pass deficit-narrowing budgets. 

Previously, Italy had often been seen as the weakest link in the euro zone and experienced its own frequent changes of government.

"It is a clear sign of confidence from international markets: political stability, credible economic policies, and support for those who create jobs and wealth are bearing fruit," Meloni said in a statement on Saturday.

Italy's 2024 budget deficit of 3.4% of gross domestic product was well within the government's 3.8% target, and Economy Minister Giancarlo Giorgetti has suggested it could fall below the European Union's 3% ceiling this year, a year ahead of schedule. 

"We have put Italy back on the right track," Giorgetti said in a brief statement after the upgrade. 

Fitch forecast a deficit of 3.1% of GDP this year "reflecting solid tax revenue performance in line with a widening tax base thanks to improved labor market conditions and rising tax compliance". 

Defence spending is on track to reach 2% of GDP in 2025, mostly due to a reclassification of its spending, Fitch said, adding that it expects only limited additional expenditure on defence in 2026-2027.

Fitch's review of Italy will be followed in coming weeks by S&P Global, Moody's, Morningstar DBRS and Scope Ratings.

(Additional reporting by Yamini Kalia in Bengaluru and Gavin Jones in Rome; Editing by Krishna Chandra Eluri and Hugh Lawson)