by Sara Rossi and Antonella Cinelli

PARIS (Reuters) – Italy is unlikely to emerge unscathed from the sequence of rating outlook revisions that begins this Friday, analysts say, but the prevailing view is that rating agencies will downgrade Rome’s outlook while avoiding a drop in the Italian rating.

Any negative surprise is likely to trigger a rebound in the rate gap, which has been rising for months, a trend exacerbated since Rome raised its budget deficit targets for 2023-2025 in September.

S&P Global begins the review cycle on Friday, followed by DBRS, Fitch and Moody’s, each one week apart.

“A downward revision of the outlook from S&P Global, Fitch or DBRS is likely,” said Alessandro Tentori, investment director for Italy at Axa Investment Managers.

All three agencies currently have a stable outlook for Italy.

Several analysts said a rating cut could lead to an increase in the rate spread between Italy and Germany from 200 basis points to 250 basis points for 10-year securities, while that a deterioration in the outlook would likely lead to a more moderate increase in this gap, to around 220 basis points.

Moody’s is the main risk factor, with the agency rating Rome one notch above “speculative” and already having a negative outlook on the country. The agency will reveal its decision on November 17.

Althea Spinozzi, senior fixed income strategist at Saxo Bank, said a Moody’s rating downgrade would send yields soaring and “de facto force the European Central Bank to intervene.”

However, the strategist stresses that the consequences of such a cut would likely be enough to convince the agency to keep the rating unchanged, a view shared by other analysts.

“A downgrade would have quite significant ramifications for peripheral debt in general,” notes Jim Leaviss, manager at M&G Investments.

Higher yields would make it more expensive to service Italy’s huge public debt, which represents around 140% of GDP.

Next year, Rome will have to borrow 548 billion euros in bonds, or 46 billion more than in 2023, according to calculations by Intesa Sanpaolo.

However, Giovanni Radicella, head of bonds at Arca Fondi, considers an Italian crisis improbable.

“One of the reasons to buy a country is the risk premium. And when it reaches an attractive threshold, it will attract buyers again and the sale will be contained,” he summarizes.

(Reporting Sara Rossi, Antonella Cinelli, additional reporting Valentina Consiglio, Dhara Ranasinghe, Corentin Chappron, edited by Jean-Stéphane Brosse)

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