Fitch Ratings on Friday cut Italy’s sovereign debt outlook to ‘negative’, citing expectations that the new coalition government’s fiscal loosening would leave the country’s high levels of debt more exposed to potential shocks.
The ‘new and untested nature’ of the country’s populist government, which has been in office since June and is made up of the anti-establishment 5-Star Movement and the far-right League, also contributed to the decision, the agency said.
Fitch in June had warned that expansionary fiscal measures that could weaken Italy’s debt position would be the main risk to its credit rating.
The agency retained its ‘BBB’ credit rating, citing the country’s diversified economy.
Italy’s 2.3 trillion euro debt is the world’s third-largest and equivalent to more than 130 percent of its domestic output.
The new government has pledged to follow through on its electoral pledges to provide a minimum income for the poor, cut taxes and water down a 2011 pension reform.
Investors are concerned that slashing taxes and increasing welfare spending could increase the country’s mammoth debt and set the country on a collision course with its eurozone partners.
At an auction on Thursday, investors pushed Italy’s 10-year borrowing cost to its highest in over four years.
Moody’s, which in May placed Italy’s “Baa2” rating on review, last week extended to the end of October a deadline to decide whether to cut Italy’s debt ratings.
The new government will unveil its public finance targets in September and the cabinet will approve the budget in late October.