The autumn schedule of ratings agency assessments and the biases revealed by an IMF study

In addition to confirming the 2025 deficit at 3.1 per cent of GDP – and with it Italy’s continued participation in the European excessive deficit procedure – yesterday Istat also announced the primary surplus for 2025 – that is, the balance between revenue and expenditure net of interest on debt – which rose from 0.5 per cent of GDP in 2024 to 0.8 per cent last year (equivalent to 17.4 billion euros). Interest expenditure, at over 87 billion (3.8 per cent of GDP), certainly contributed to ‘pushing’ the overall balance back into the red. Economy Minister Giancarlo Giorgetti is right on this point: “Every extra euro spent on interest is one euro less for useful expenditure”. Rating agencies play a role in this regard; their assessment of a country’s sovereign debt influences the decisions of both international and domestic investors, and affects borrowing costs and, consequently, interest expenditure.

In a recent IMF working paper, Olivier Blanchard, the Fund’s former chief economist, together with Daniel Leigh and Prachi Mishra, asked just what factors influence the agencies’ ratings. Their study compares the ratings of the three leading global agencies (S&P, Moody’s and Fitch) for 35 advanced economies from 1995 to 2025, using a ‘simple model’ in which a country defaults if its debt-to-GDP ratio rises above a certain threshold. The authors place greater weight on the trend in the debt-to-GDP ratio than on its initial level and criticise the agencies for “placing too much weight on the stock of debt relative to forecasts of primary balances, and underestimating the effects of the difference between the interest rate on debt and economic growth”. According to the authors, an additional one percentage point of GDP in primary surplus should weigh on the rating as much as a 14 percentage point reduction in debt, whilst in actual ratings the same percentage point of primary surplus is worth, to the agencies, a reduction of 1.3–1.9 percentage points in debt. For a highly indebted country with a primary surplus, such as Italy, this means that the inherited stock of debt weighs much more heavily on the rating than the efforts made to reduce it.

The next agency to publish its rating on Italy will be Moody’s, this Friday; for the time being, it has assigned Italy a Baa2 rating (two notches above speculative-grade bonds) with a stable outlook, with no changes in sight. Then, on 16 October, it will be DBRs’ turn, which gives Italy an ‘A (low)’ rating with a stable outlook, followed on 13 November by S&P, which rates Italy as ‘BBB+’ with a positive outlook. By 2025, all three had raised their ratings for Italy – which were certainly not high to begin with – thanks to the government’s efforts to bring the deficit down from 8.1 per cent in 2022 to 3.1 per cent, and despite debt rising from 134.2 per cent in 2024 to 136.7 per cent in 2025. To put this into perspective, France is currently rated A+ by S&P and Fitch, and Aa3 by Moody’s, despite a deficit of 5.8 per cent in 2024 and 5.1 per cent in 2025 – projected to reach 5.4 per cent this year – extremely high political instability, and a debt level expected to rise to 119 per cent of GDP this year.

It is widely believed that the market reacts before the agencies do: yesterday, the spread between French OATs and Bunds reached 104 points, whilst the Italian spread stood at 87. However, what the authors of the IMF study demonstrate is how the ‘country effect’ carries too much weight in credit ratings, as if it were a fixed, permanent bonus or penalty in its own right, not explained by other accounting factors.

Looking solely at debt and budget balances explains barely 3 per cent of why rating agencies assign different ratings to various countries; adding the ‘country effect’ – calculated by economists based on thirty years of ratings – accounts for almost 50 per cent. Thus, the authors estimate the maximum debt-to-GDP ratio – with a primary balance of zero and applying the ‘country effect’ – at which a country would have a 50 per cent probability of maintaining an AA rating from S&P: 272 per cent for Singapore, 248 per cent for Germany, 161 per cent for the United States, 135 per cent for France, and 89 per cent for Italy. According to the authors’ calculations, the Baltic states would not receive an AA rating even with zero debt.

Thus, the ‘country effect’ becomes an inherited reputation, one with a ‘striking impact’ that remains unshaken by governments and their budgetary decisions.