Moody's Slashes Italy's Credit RatingFinance | October 5, 2011, Wednesday // 06:58| views
Prime Minister Silvio Berlusconi said the decision was expected. Photo by EPA/BGNES
The Italian government's credit rating has been slashed by Moody's from Aa2 to A2 with a negative outlook.
The ratings agency blamed a "material increase in long-term funding risks for the euro area", due to lost confidence in eurozone government debts.
The credit rating agency said it was concerned that Italy may have to pay more to borrow, noting that the country will have to refinance more than ?200 billion in debt next year.
Moody's cited "the fragile market sentiment" in the euro area that is likely to result in "materially increased financing costs and funding risks."
Prime Minister Silvio Berlusconi said the decision was expected.
"The Italian government is working with the maximum commitment to achieve its budget objectives," said Berlusconi.
He said that a plan to balance the government's budget by 2013 had been approved by the European Commission.
In a separate statement Tuesday, Moody's said it expected weak market conditions to persist.
Moody's also called out Italy's "structural economic weaknesses" -- among them low productivity, which has been an "impediment" to economic recovery.
Lastly, the ratings agency expressed concern that Italy might not meet its debt reduction targets and that could make it more susceptible to market shocks.
"Since more than half of the consolidation measures are based on government revenue growth, the plans are vulnerable to the high level of uncertainty around economic growth in Italy and elsewhere in the EU," the agency said.
Moody's said it expects Italy's public debt-to-GDP ratio to hit 120% by the end of this year, up from 104% at the start of the global financial crisis.
Moody's action comes two weeks after Standard & Poor's cut Italy's sovereign credit rating to A from A+, and said its outlook on the rating remained negative.
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