Italy credit rating downgraded from Aa2 to A2
The Italian government's credit rating has beendowngraded by Moody's from Aa2 to A2 with anegative outlook. The ratings agency invoked a"material increase in long-term funding risks forthe euro area", due to lost confidence inEurozone government debts.Despite Rome's low current borrowing needs,and low private-sector debt levels in Italy,Moody's said market sentiment had turnedagainst the euro. Prime Minister Silvio Berlusconisaid the decision was expected."The Italian government is working with the maximum commitment to achieve its budget objectives,"said Mr. Berlusconi. He added that a plan to balance the government's budget by 2013 had beenapproved by the European Commission.Analysts say Italy's downgrade is likely to be followed by similar cuts in the credit rating of Italy's banks,which would put severe pressure on their ability to borrow."This downgrade will make it even harder for Italy to borrow. However, that is not
the worst of it’’,
saysBBC business editor Robert Peston
If Italy is looking like a more risky place to lend, its banks... will findit harder and more expensive to borrow. The Eurozone banking crisis will be exacerbated."Moody's also raised warnings about Italy's growth outlook, citing structural economic problems in Italy,as well as the global economic slowdown. Another problem noted by the rating agency was what itcalled political and economic "implementation risks"."The question is, if [eurozone governments] will move fast enough... to really put in place a crediblesolution," says Robert Peston.The slow political response to the emerging crisis, necessitated by the European Union's institutionalset-up, has been criticised by many commentators, including European Commission President JoseManuel Barroso.However the key issue for Moody's was the change in the market's attitude towards eurozonegovernment debts. Moody's said that Italy could be further downgraded to "substantially lower ratinglevels" if a further deterioration in investor sentiment made it even harder for the country to raise cashfrom the markets.The Italian government has for several years earned more in tax revenues than it spends. However, thegovernment also has a large outstanding debt - equivalent to nearly 120% of GDP.Italy's cost of borrowing rose sharply over the summer on market fears that a slowdown in Italiangrowth could make existing debts unsustainable.