Euro is under pressure, hovering near a two-year low against the dollar after Moody’s ratings agency downgraded Italy’s government bond rating by two notches to Baa2 from A3 late on Thursday night. The agency also said that further downgrading is possible.
In a statement, Moody’s said: “Italy’s near-term economic outlook has deteriorated, as manifest in both weaker growth and higher unemployment, which creates risk of failure to meet fiscal consolidation targets.”
Moody’s added that “Failure to meet fiscal targets in turn could weaken market confidence further, raising the risk of a sudden stop in market funding.”
The ratings cut came just ahead of an Italian government bond sale on Friday. More than 5 billion euros ($6.1 billion) worth of debt was targeted to be sold at the bond auction. The target was indeed met, and initially Italian bond yields traded lower after the news, giving a slight boost to the euro. However, the euphoria was short lived and EURUSD moved back to prior levels, last trading at 1.2201 at 09:23 GMT.
Italy is the euro zone’s third-biggest economy, so the lower ratings, just two levels above junk, will undermine investor confidence, in the wake of a deteriorating Italian economy.
Italy’s debt is at an all time high and 10-year bond yield has risen above 6 percent in recent weeks, fueling concern that Italy might be next in line for a bailout form the EU.