Standard and Poor’s downgraded Italy’s credit rating by one notch from A from A+, with a negative outlook over concerns that the country will not be able to reduce its debt as growth weakens.
Italy holds the euro zone’s second largest debt burden and so there is increasing concern that Greece’s debt crisis, if not contained, could spread to the larger indebted economies of the euro region like Italy and Spain.
In a statement, Standard and Poor’s said Italy’s net general government debt is the highest among A-rated sovereigns. The ratings agency now expects it to peak later and at a higher level than it previously anticipated. “We believe the reduced pace of Italy’s economic activity to date will make the government’s revised fiscal targets difficult to achieve,” it said.
The announcement caused the euro to plummet against the dollar as investor concern grew that European policy makers will fail to contain the debt crisis. Meanwhile, Greece will be holding another conference call later today with its international lenders, mainly the IMF and EU, in its effort to avoid a default, while U.S. Treasury Timothy Geithner urged the region to adopt additional tools.
Italy’s downgraded comes after downgrades this year of Spain, Portugal, Ireland, Greece and Cyprus. Prime Minister Silvio Berlusconi passed a 54 billion-euro ($73 billion) austerity package this month that convinced the European Central Bank to buy its bonds after borrowing costs surged to euro-era records in August. The plan to balance the budget in 2013 wasn’t enough to sway S&P.
“We expect that Italy’s fragile governing coalition and policy differences within parliament will continue to limit the government’s ability to respond decisively to domestic and external macroeconomic challenges,” S&P said.