Moody’s Investors Service cut Italy’s bond rating by three notches from Aa2 to A2 late on Tuesday. The ratings agency cited a “material increase” in funding risks for euro zone countries with high levels of debt and gave a warning that further downgrades were possible.
In a statement Moody’s said “The negative outlook reflects ongoing economic and financial risks in Italy and in the euro area.”
“The uncertain market environment and the risk of further deterioration in investor sentiment could constrain the country’s access to the public debt markets,” Moody’s added.
Though the downgrade was not entirely a surprise, it highlights mounting concerns over the euro zone debt crisis and how the region’s third largest economy will cope as its own borrowing costs are growing. Italy is now dependent on help from the European Central Bank as it gets more difficult to obtain funds on the debt market after recent unsuccessful bond auctions and the banking system is in danger of losing liquidity.
Moody’s said that Italy’s rating could “transition to substantially lower rating levels” if there were long term uncertainty over the availability of external sources of liquidity support.
The euro pared gains against the dollar and Japanese yen immediately following the announcement late on Tuesday. The downgrade follows other ratings agency Standard and Poor’s cut of Italy’s ratings by one notch to A/A-1 on September 19.