Fitch Ratings on Aug. 9 affirmed Italy's long-term foreign-currency issuer default rating at BBB with a negative outlook, citing elevated government debt and heightened uncertainties amid a looming snap election.
Deputy Prime Minister Matteo Salvini last week called for new elections amid persistent policy differences with coalition partner Five Star Movement, pushing the Italian government coalition into crisis. The prospect of a snap election comes only a month after Italy dodged a disciplinary procedure from the EU over its excessive debt levels.
Despite the European Commission's decision not to press ahead with a fine, Fitch said "the nature of any fiscal adjustment in 2020 remains unclear" and that tensions between Rome and the EU are likely to reemerge.
"[B]ut we believe a future government will be wary of fully disengaging from EU processes, which could risk financial market instability," the agency said.
Fitch sees "some moderate upside potential to medium-term debt sustainability" if a new government proves to be more stable.
"In contrast, there are downside risks to the fiscal outlook should a future government opt to disengage from EU fiscal rules and be more willing to risk financial market instability," it said.
The rating agency forecasts Italy's government deficit to come in at 2.1% of GDP in 2019, unchanged from last year but 0.2 percentage point lower than Fitch's prior projections. GDP growth is expected at 0.1% in 2019, down from 0.9% in 2018.