Italy's higher budget deficits this year and next could make it ineligible for bond support under the European Central Bank's latest scheme, which would be negative for Rome's credit profile, Scope Ratings said on Friday.
Giorgia Meloni's government last week hiked its deficit targets and cut growth projections, triggering an increase in the gap between Italian and German bond yields which on Thursday exceeded 200 basis points, the widest since March.
"The projections of EU member states' 2024-25 fiscal deficits matter ... they indicate whether one of the conditions for the ECB's potential Transmission Protection Instrument (TPI) activation – compliance with the EU fiscal framework – continues to be met," the agency wrote in a report seen by Reuters.
Italy has forecast the deficit to fall to the European Union's 3% of gross domestic product ceiling only in 2026, and sees virtually no debt reduction during the 2023-2026 period.
The eligibility of Italian securities under the ECB's TPI "is a key driver of its BBB+/Stable credit rating," Scope said.
It will review its rating of Italy's debt on Dec. 1.
The TPI is an emergency scheme crafted by the ECB to stem unjustified rises in countries' bond yields. However, it will not be used to buy bonds of countries that make "policy errors", the bank's President Christine Lagarde said after it was introduced last year.
More specifically, countries must respect the EU's economic prescriptions, have a sustainable public debt, and not show any macroeconomic imbalances.
EU governments are negotiating over new fiscal rules to be introduced next year after they were temporarily suspended in 2020 due to the COVID-19 pandemic.
RATING AGENCIES' TEST
Before Scope assesses Italy's rating in December, the country faces scrutiny from several larger agencies.
From mid-October to mid-November, S&P Global, DBRS, Fitch and Moody's all have the euro zone's third largest economy up for review in what analysts say will be key tests for the stability of Italian bond yields.
Last month the Italian Treasury increased its estimate for debt issuance this year due to worsening state finances and delays in transfers from the European Union, the only major euro zone country to do so.
Scope also highlighted a risk that the ECB will accelerate the end of bond buying under its Pandemic Emergency Purchase Programme (PEPP), which is so far expected to continue at least until the end of next year.
An early closure of the programme would mean Rome would have to find alternative buyers of about 50 billion euros ($52.61 billion) worth of securities, some 10% of its estimated gross financing needs in 2025, according to Scope calculations.
The agency said its expectation was that in order to remain eligible for TPI, Italy would stick to a reform agenda and gradual fiscal consolidation over coming years.
Nonetheless, the risk is rising of slightly wider and persistent fiscal deficits and further delays in the reforms needed to secure the transfer from the European Commission of billions of euros of EU pandemic recovery funds, it said.
($1 = 0.9504 euros)
