Italy credit rating downgraded from Aa2 to A2

The Italian government's credit rating has been downgraded by Moody's from Aa2 to A2 with a negative outlook. The ratings agency invoked a "material increase in long-term funding risks for the euro area", due to lost confidence in Eurozone government debts. Despite Rome's low current borrowing needs, and low private-sector debt levels in Italy, Moody's said market sentiment had turned against the euro. Prime Minister Silvio Berlusconi said 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 been approved 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’’, says BBC business editor Robert Peston. ‘’If Italy is looking like a more risky place to lend, its banks... will find it 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 it called political and economic "implementation risks". "The question is, if [eurozone governments] will move fast enough... to really put in place a credible solution," says Robert Peston. The slow political response to the emerging crisis, necessitated by the European Union's institutional set-up, has been criticised by many commentators, including European Commission President Jose Manuel Barroso. However the key issue for Moody's was the change in the market's attitude towards eurozone government debts. Moody's said that Italy could be further downgraded to "substantially lower rating levels" if a further deterioration in investor sentiment made it even harder for the country to raise cash from the markets. The Italian government has for several years earned more in tax revenues than it spends. However, the government 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 Italian growth could make existing debts unsustainable.

That prompted the European Central Bank to intervene by buying up Italian bonds - a controversial policy in Germany. But despite the ECB’s action, Italian borrowing costs have begun to increase again in recent weeks.