• Credit rating downgrade hits Italy

    In a move that ratchets up the pressure on EU leaders to work faster to resolve the eurozone’s banking and sovereign debt crisis, Moody’s Investors Service on Tuesday (4 October) knocked down Italy’s credit rating by three notches.

     

    While Prime Minister Silvio Berlusconi dismissed the downgrade as expected, the move was motivated by concerns that the country was burdened with “political and economic uncertainties”.

    “The negative outlook reflects ongoing economic and financial risks in Italy and in the euro area,” the ratings agency said.

    “The uncertain market environment and the risk of further deterioration in investor sentiment could constrain the country’s access to the public debt markets,” continued the assessment by the firm.

    The downgrade, three notches down from Aa2 to A2, also follows on from a similar move by Standard & Poor’s, a rival credit ratings agency, which slashed the ratings on Italian government bonds by one notch to A with a negative outlook on 19 September.

    The Moody’s assessment also places the country on a negative outlook, which leaves the country at risk for yet further downgrades.

    The consensus adjustment in the country’s credit rating now appears to put Italy firmly in the category of peripheral eurozone states in danger of losing access to credit and no longer a core country merely infected by contagion from Greece and its fellow bail-out countries.

    Although the country has a low budget deficit, its debt is now up to €1.9 trillion, or 120 percent of GDP, but, crucially, Italy has long been mired in a low-growth trap.

    Fitch, another ratings agency, on Monday slashed its growth estimates for the country for 2012 from one percent down to 0.2 percent and for 2013 from 1.6 percent down to 0.6 percent. The firm warned that austerity and tax hikes were pulling down growth prospects.

    “Implementing a stricter austerity package which includes a one percent VAT rise, a three percent tax on the highest incomes and several government spending cuts will have a negative effect on private consumption and medium-term investment,” the agency said in a statement.

    The Moody’s downgrade also reflected concerns over the government’s ability to push through structural adjustment.

    Having endorsed a fresh austerity package worth some €54 billion last month, Rome is battling divisions in the governing coalition over the introduction of new measures liberalising the economy that were supposed to have been unveiled by the end of last month and few details have been made public.

    The prime minister, Silvio Berlusconi, himself is distracted by three different court cases.

    He immediately dismissed the downgrade, saying that Italy intends to balance its budget by 2013 and that the ratings cut had been in the works since Moody’s said on 17 September it was reviewing the country’s standing with a view to a possible cut.

    However, in an ominous warning to the country, the agency said that Italy was on track for ratings cuts to “substantially lower rating levels”.

    Source: EUobserver, OEIC staff