Greece’s credit rating improves as Italy faces downgrade

Greece’s credit rating has been upgraded by one of the major rating agencies, while Italy’s rating has been lowered amid political and economic uncertainty. This is a sign of the diverging fortunes of the two eurozone countries, which have both struggled with debt and growth issues in the past decade.

Greece gets a boost from Fitch

Fitch Ratings announced on Monday that it has raised Greece’s long-term foreign currency issuer default rating (IDR) from BB- to BB, with a stable outlook. This means that Greece is now two notches below investment grade, or the level at which most institutional investors are allowed to buy bonds.

Greece’s credit rating improves as Italy faces downgrade
Greece’s credit rating improves as Italy faces downgrade

Fitch cited several factors for its decision, including:

  • The strong recovery of the Greek economy from the pandemic-induced recession, with a projected growth rate of 7.5% in 2023 and 5.5% in 2024.
  • The improved fiscal performance and debt sustainability of the Greek government, supported by low borrowing costs and favorable financing conditions from the European Union.
  • The progress made by the Greek authorities in implementing structural reforms and addressing legacy issues, such as the high stock of non-performing loans in the banking sector.

Fitch also noted that Greece has benefited from the Next Generation EU (NGEU) fund, which will provide up to 30.5 billion euros of grants and 12.7 billion euros of loans to support public investment and reforms in the next six years. The rating agency expects that this will boost Greece’s potential growth and competitiveness, as well as reduce regional disparities and social inequalities.

Italy faces challenges from S&P

Meanwhile, Standard & Poor’s (S&P) downgraded Italy’s long-term foreign currency IDR from BBB to BBB-, with a negative outlook. This means that Italy is now one notch above junk status, or the level at which most investors consider bonds too risky to buy.

S&P cited several reasons for its decision, including:

  • The weak economic outlook for Italy, which is expected to grow by only 2.8% in 2023 and 1.8% in 2024, after contracting by 6.2% in 2022 due to the pandemic.
  • The high public debt burden of Italy, which reached 159.8% of GDP in 2022 and is projected to remain above 150% until 2024. S&P warned that this poses significant risks to Italy’s fiscal sustainability and financial stability, especially if interest rates rise or growth slows down.
  • The political uncertainty and instability in Italy, which has seen four different governments in the past three years. S&P expressed doubts about the ability and willingness of the current coalition led by Prime Minister Mario Draghi to implement structural reforms and fiscal consolidation measures.

S&P also noted that Italy stands to receive 68.9 billion euros of grants and 122.6 billion euros of loans from the NGEU fund, which could help boost its economic recovery and resilience. However, S&P cautioned that the effective use of these funds depends on the quality and timeliness of Italy’s spending plans and their implementation.

Implications for the eurozone

The contrasting ratings of Greece and Italy reflect their different economic and political situations, as well as their divergent responses to the pandemic and its aftermath. While Greece has shown remarkable progress in overcoming its long-standing challenges and seizing new opportunities, Italy has lagged behind in addressing its structural weaknesses and exploiting its potential.

The ratings also have implications for the eurozone as a whole, as they affect the borrowing costs and market confidence of its member states. A higher rating for Greece could lower its interest rates and increase its access to capital markets, while a lower rating for Italy could raise its interest rates and reduce its investor appeal.

Moreover, the ratings could influence the future direction and cohesion of the eurozone, as they reflect the different views and expectations of its members regarding fiscal discipline, monetary policy, and integration. A more stable and prosperous Greece could strengthen its ties with other eurozone countries, while a more fragile and troubled Italy could strain its relations with them.

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