S&P Surprisingly Cuts Italy Debt Rating over Growth Fears

Bad news keeps piling up for Italian Prime Minister Berlusconi who has come under fire over the economy, in the courts and has seen his approval ratings among voters plunge. Photo by EPA/BGNES

Italy has had its sovereign debt rating cut by Standard & Poor's, the latest, but nevertheless surprise move in a deepening European debt crisis.

Standard & Poor's cut its rating one level to A/A-1 from A+/A-1+. The outlook is negative.

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

"The downgrade reflects our view of Italy's weakening economic growth prospects," Standard & Poor's said. "Italy's fragile governing coalition and policy differences within parliament will likely continue to limit the government's ability to respond decisively to the challenging domestic and external macroeconomic environment."

Standard & Poor's downwardly revised its estimates for Italy's GDP growth to an annual average of 0.7% between 2011 and 2014 -- a far cry from its previous projection of 1.3%.

"More subdued external demand, government austerity measures, and upward pressure on funding costs in both the public and private sectors will, in our opinion, likely result in weaker growth for the Italian economy," Standard & Poor's said.

This slower pace of growth will in turn make the government's fiscal austerity goals more difficult to achieve, the agency said.

And if the country's plans for revenue reform aren't completed, or if political gridlock delays responses to the country's current financial challenges, Italy could accumulate even more debt and warrant another rating slash, Standard & Poor's warned.

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

The rating cut is expected to make even more nervous investors, lenders and markets, already shaken over concerns whether or not Greece will default on its debt. The downgrade is likely to raise Italy's borrowing costs further.

"Coming at a time when the world's financial markets are on edge, warily watching for a default by Greece with knock-on unknown effects on the financial system, the optics of this downgrade stink," said Carl Weinberg of High Frequency Economics told BBC.

"Perceptions are more important than realities," he added.

"Investors will be shaken, as if they are not shaken enough already, by what appears to be decaying conditions for another sovereign issuer."

At the end of May the Italian government approved austerity measures worth EUR 24 B (1.6% of GDP) for the years 2011-2012, making the country the latest eurozone member to announce cuts in an effort to reduce the gap between spending and earnings.

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