S&P downgrade Italy’s sovereign debt

| September 20, 2011 | 0 Comments

Credit ratings agency Standard & Poor’s (S&P) has today downgraded Italy’s sovereign debt by one notch to A from A+, and kept it on a negative outlook.

The agency cited weak economic growth prospects, which may impact on the country’s ability to reduce its deficit.

The Italian Senate recently passed a tough austerity budget, which proposes cuts of €48 billion (£42 billion) over the next three years.

The measures come as the country aims to cut the deficit to zero by 2014 from this year’s 3.9% of GDP.

The austerity package comes as fears have been building for Italy, which is the euro zone’s third largest economy, will be forced to accept a bailout like Greece, Ireland and Portugal.

Italy has the second highest sovereign debt ratio in the euro zone and fears have been growing for the country becoming the next victim of the crisis.

However, today’s move by S&P did not affect stock markets with shares rallying in morning trading today.

Italy’s MIB index was 1.3% higher in the first hour of trading, while Germany’s Dax rose 1.5% and London’s FTSE 100 gained 0.7%.

Meanwhile, in a statement, S&P said: “We believe the reduced pace of Italy’s economic activity to date will make the government’s revised fiscal targets difficult to achieve.

“Furthermore, what we view as the Italian government’s tentative policy response to recent market pressures suggests continuing future political uncertainty about the means of addressing Italy’s economic challenges, it added”

However, commenting on the downgrade, Prime Minister Silvio Berlusconi said: “The assessments by S&P seem dictated more by newspaper stories than by reality and appear to be negatively influenced by political considerations.”

Fellow ratings agency Moody’s is expected to follow suit as it rates Italy three notches higher than S&P.

Italy becomes the latest in a series of downgrades after Spain, Ireland, Greece, Portugal and Cyprus have all had their credit ratings cut this year.

However, the move is likely to fuel fears of contagion in the euro zone.

Tags: austerity, , , , , negative outlook, , ,

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