Italy remains at two levels above junk at S&P Global Ratings after Giorgia Meloni’s government weathered the first of several possible assessments on its looser deficit prospects.

“The stable outlook balances our view of a slower budgetary consolidation than we previously expected, including due to increasing interest payments on large government debt, against the significant economic stimulus EU funds should provide,” S&P said in a statement confirming the country’s BBB rating.

The outcome is good news for the populist coalition, whose recent budget law and wider deficit forecasts had unnerved some investors, pushing the spread between Italian and German 10-year bonds higher.

That common measure of risk has widened sharply since the end of August. It was around 200 basis points on Friday, close to its highest levels this year, ahead of S&P’s verdict.

The rating is two notches above junk, one higher than the assessment of Moody’s Investors Service. That company is scheduled to release its own view on Nov. 17, one in a series by rivals that will intensify scrutiny on the country’s public finances.

“Markets will remain nervous going into Italy rating reviews” and spreads “will likely remain under pressure given risk sentiment,” Emmanouil Karimalis, a strategist at UBS Group AG in London, said earlier on Friday.

While a credit downgrade remains unlikely, it would not be surprising if one of the agencies puts Italy on watch for a potential downgrade, Karimalis added.

What Bloomberg Economics Says...

“Despite the recent loosening of the fiscal stance, S&P kept Italy’s rating unchanged, alleviating investors’ fears of a shift to a negative outlook. This is positive news for the Italian government as it mitigates immediate risks of a flare up in markets. As other credit agencies are scheduled to update their ratings in coming weeks, investors will keep a close eye on Italy.”

—Simona Delle Chiaie, Italy economist.

Meloni faces a hard road ahead as she confronts weak economic output, which is seen growing just 0.7% this year, according to the Bank of Italy. Higher borrowing costs and slumping global trade are also hurting the country’s businesses.

“By 2025, we project that Italian real GDP growth will recover to above 1%, after a deceleration in 2023-2024,” S&P said Friday.

A separate S&P review of Greece, raised that country’s rating to investment grade for the first time in more than a decade, though it remains one notch below Italy.

The government is still trying to keep promises to voters, including tax cuts and aid to lower income families. That’s making it difficult to bring the deficit as a percentage of gross domestic product below the European Union’s limit of 3% until 2026 — a year later than originally planned.

Meloni has promised growth-boosting investments, but it’s also struggling to spend EU Recovery funds that could help improve infrastructure. That is one of the factors that S&P said it is watching closely.

“Government debt and sensitivity to market conditions will remain high,” the rating agency said. “Given the high government debt level, Italy remains particularly sensitive to a deterioration in funding conditions, which could weigh further on its budgetary performance.”

--With assistance from Alice Gledhill, Naomi Tajitsu, Hari Govind and Chiara Albanese.

(Updates with Bloomberg Economics after seventh paragraph)