Fitch Ratings slashed its rating from “stable” to “negative” after Italy’s new populist leader Matteo Salvini vowed to cut tax.
Italy remains defiant with the Lega-Five Star Movement coalition saying it could even breach the EU’s budget limits to carry out its election promises.
Branding the coalition a government of “new and untested nature”, Fitch said Italy could easily plunge into economic crisis due to a shock, be that a short-run fluctuation or a significant change of economic growth.
The agency said: “Fitch expects a degree of fiscal loosening that would leave Italy’s very high level of public debt more exposed to potential shocks.”
The eurosceptic government vowed to switch the country to a flat tax system and to introduce the basic income, despite these measures believed to be very costly for the debt-stricken country.
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Italy’s £2trillion (€2.3trn) debt is the world’s third-largest and equivalent to more than 130 percent of its domestic output.
Fitch retained its “BBB” credit rating, the fourth-best rating assignable.
The rating evaluates the credit risk of a prospective debtor, predicting its ability to pay back and forecasting the chances it will default.
Following Fitch’s new rating, a source in Prime Minister Giuseppe Conte’s office said the government’s 2019 budget would “confirm the commitment to proceed along the path to reduce Italian debt”.
But despite the downgrading, the government did not signal a will to scale down on its promises.
Lega leader Matteo Salvini renewed on Saturday his tax-cut promise, saying on Twitter “step by step” tax cuts would fuel economic growth.
The flat tax, which imposes the same tax percentage on all individuals regardless of income, would cost Italy some £44.81bn (€50bn), while the basic income, which according to the Italian government would help fighting poverty, could amount to some £31.37bn (€35bn).
And on Friday, an Italian government official said the country could exceed the EU budget ceiling next year if needed to carry on with the promised reforms.
The remark drove short-dated bond yields, the amount of return investors get from bonds, to their highest levels in almost three months.
The expensive measures Rome has vowed to take are concerning investors, who believe Italy could be setting itself on a collision course with its eurozone partners.
Economy Minister Giovanni Tria said: “We have commitments to Europe that must be respected, but they essentially are a function of the financial markets.”
Mr Tria also added that the government will let know its actions in the next few weeks.
He added: “The Fitch judgements will be corrected positively since they are opinions not based on facts, but on intentions attributed to the government.”