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Italy Downgraded from A+ to A by S&P

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Standard and Poor's dropped Italy's credit rating from A+ to A.

Standard & Poor’s drops credit rating to A from A+, blaming sluggish economy and ineffective government reforms.

Italy has had its sovereign credit rating cut by Standard and Poor’s, with the ratings agency keeping the country’s outlook on negative in a surprise move that may add to contagion fears in the debt-stressed eurozone.

Italian prime minister Silvio Berlusconi swiftly attacked S&P, claiming the ratings agency’s action was “dictated more by newspaper stories than by reality”.

S&P cut Italy’s government debt rating to A/A-1 from A+/A-1+ and said Italy’s economic growth prospects were getting weaker, with planned reforms by the government not expected to help much.

“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.

Italy follows eurozone partners Spain, Ireland, Greece, Portugal and Cyprus in having its credit rating downgraded this year. The country, which approved an austerity programme last week, currently has a debt-to-GDP ratio of 120%.

S&P took the decision after lowering its annual growth forecast for Italy to just 0.7% between 2011 and 2014, down from 1.3% a year. It also questioned whether Italy’s austerity plan would deliver the €60bn (£52bn) savings that the government is aiming for.

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

“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.

Berlusconi said in a brief statement in response to the S&P move: “The assessments by S&P seem dictated more by newspaper stories than by reality and appear to be negatively influenced by political considerations.”

Berlusconi’s government is already taking action against ratings agencies, with police raiding the offices of Moody’s and S&P last month.

Kathy Lien, director of currency research at GFT, said the ratings downgrade would have a heavy impact on the eurozone. “Italy is a much bigger deal than Greece,” she said. “It’s a much bigger deal because a lot more countries are exposed to Italian debt than they are Greek debt. The greatest concern was never really about Greece but the contagion over to Italy and to Spain.”

Gary Jenkins at Evolution Securities said the S&P news came just as Moody’s was expected to also downgrade Italy: “Just when everyone was waiting for Moody’s to downgrade Italy, S&P gets in first with what is a much more damaging downgrade as its rating of Italy was already the lowest of the three agencies. The S&P move is likely to be very negative for sentiment because whilst the market was expecting a downgrade it was probably not expecting one from an agency with the lowest rating which did not even have the sovereign on credit watch, but merely a negative outlook.”

Stock markets fell early on, but later recovered, with the FTSE 100 in positive territory. Overnight the Japanese Nikkei fell by 1.6%.


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