Italy’s credit rating slashed

Adding to Italy's already piling economic woes, Moody’s downgrades the country's credit rating by three notches, following a similar move by Standard & Poor's a month ago. It also warned of impending further downgrades in the eurozone.

An increase of funding risks due to high public debt, macroeconomic structural weaknesses, and time needed to achieve government’s targets, due to “economic and political uncertainties” were listed as the three drivers prompting the downgrade.This is the first Moody’s downgrade suffered by Italy since 1993.Italy now holds an A2 rating, which is lower than Estonia’s and same as that of Malta, with a negative outlook on debt, which implies the possibility of another downgrade in the near future.“The uncertain market environment and the risk of further deterioration in investor sentiment could constrain the country's access to the public debt markets. If such risks were to materialize and the long-term availability of external sources of liquidity support were to remain uncertain, the country's rating could transition to substantially lower rating levels,” Moody’s statement said.“Moody's choice was expected," reacted Italy’s Prime Minister Silvio Berlusconi adding that “The Italian government is working with the maximum commitment to achieve its budget objectives," which is getting rid of the deficit by 2013."They have already traded as if there was somewhat of a downgrade in the works,” Robbert van Batenburg head of equity research at Louis Capital told Reuters.The downgrade was indeed a small surprise after the agency’s announcement of a review of Italy’s rating on September 17 and Standard & Poor's cutting of the country’s rating two days later.However, it reflects the now obvious vulnerability in the eurozone, struggling to contain the full-scale crisis in Greece, which has come to highlight chronic problems in the Italian economy.

Lack of growth the problem

With a GDP of US$2 trillion, the Italian economy is the third biggest in eurozone and the eighth largest in the world. The country has a modest budget deficit and a high level of private savings.However, in terms of growth its numbers are chronically low, with the highest expansion (just 2 per cent) cited in 2006, followed by two years of crisis decline. And now it is expected to grow by just 0.6 per cent next year, instead of an earlier projection of 1.3 per cent."Italy is being punished not because its finances suddenly deteriorated, but because investors have become more sensitive to its long-standing weaknesses," Nicholas Spiro, managing director of Spiro Sovereign Strategy told Reuters, adding "The bond markets are more concerned about Italy's ability to grow than its commitment to reducing a fiscal deficit that is already one of the smallest in the eurozone."Measures to promote growth had been promised by Italian government, but they have been delayed increasing the pressure on Berlusconi’s center-right coalition. It already suffers heavy criticism for bad handling of the eurozone crisis, while Berlusconi himself struggles with an array of scandals surrounding his person, including allegations of paying an underage prostitute and keeping a Russian mistress.Now the Standard & Poor's and Moody’s downgrades might force “force Italian policymakers to embark on more austerity programs,” van Batenburg believes.