Business

Italy's sovereign debt rating cut by S&P on growth fear

  • 20 September 2011
  • From the section Business

Italy has had the rating of its creditworthiness cut, the latest move in the European debt crisis.

Standard and Poor's cut its rating by one level to A from A+.

The agency cited Italy's weak growth, criticised Rome's response to the debt crisis so far and said political uncertainty could hamper it in future.

Markets shrugged off the decision, while Italian Prime Minister Silvio Berlusconi said the move was influenced by "political considerations".

Mr Berlusconi said the downgrade had been dictated more by stories in the media than by economic reality.

'Catching up'

Having started marginally lower, European stock markets then rose in morning trading.

Italy's MIB index rose 1.6% in the first three hours, while the German Dax was up 2.3% and London's FTSE 100 1.4%.

"S&P were only catching up with the markets," said Jane Foley, currency strategist at Rabobank.

"The markets have been penalising the Italian bond market for some months now for its fragile coalition [and] messy budget talks."

She added that fellow agency Moody's, who rates Italy three notches higher than S&P does, was now widely expected to follow suit with its own downgrade.

'Future uncertainty'

Italy recently passed an unpopular austerity budget, but S&P suggested this did not go far enough.

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

"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."

S&P criticised the austerity budget's heavy reliance on tax rises - including a one-percentage-point increase in VAT - saying that taxes are already high in Italy, and the increases would weigh further on growth.

The 60bn euros (£52bn, $82bn) of austerity measures laid out in the budget are equivalent to 2.8% of Italian economic output.

Rome aims to balance its budget by 2013.

But the government is now expected to cut its growth forecast for this year from 1.1% to 0.7%, and this may force it to revise its borrowing forecast up.

The Italian finance minister, Giulio Tremonti, is meeting bankers and businessmen to discuss ways of boosting the country's growth rate.

Questions about the government's leadership played a major role in S&P's analysis:

"Even under pressure, Italian political institutions, incumbent monopolies, public sector workers, and... unions impede the government's ability to respond decisively to challenging economic conditions," the agency said in its report.

"It is unclear what can be done to break the deadlock between these political institutions and the government."

Contagion fears

Italy follows fellow eurozone countries Spain, the Republic of Ireland, Greece, Portugal and Cyprus in having its credit rating downgraded this year.

The surprise move by the ratings agency will fuel fears of contagion in the eurozone.

Italy has Europe's second-largest debt level and the cost of that debt has been rising in recent weeks as lenders to Italy have become nervous about its ability to repay loans.

Spain is also struggling to boost its flagging growth rate, and to bring its unemployment rate down from 21%.

"We are recovering more slowly than we would like," said the Spanish Finance Minister, Elena Salgado, on Tuesday.

She said her government would not lower its economic growth targets, although she conceded that if they were setting new forecasts today they might be different.

Nonetheless, the costs of borrowing for Italy and Spain were virtually unchanged on Tuesday morning following S&P's announcement.

Italy's bond yield, which indicates its cost of borrowing, hovering around 5.6% in early trading.

The euro rose marginally against the dollar to $1.37.

The latest news comes after concern over Greece and whether or not it will default on its loans hit markets hard on Monday.

The Greek government is in talks with the International Monetary Fund and the European Union about getting more bailout money released.

A second conference call to finalises Greece's latest austerity measures is set to take place later on Tuesday.

Earlier this month, S&P cut the credit rating of the US from AAA to AA+ for the first time in its history.

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