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Italy downgrade

October 6, 2011

Another ratings downgrade for Italy is another blow for Berlusconi and for the Italian economy. Moody's cited a lack of confidence in the country as the reason for its downgrade, and forecast a negative outlook.

Italian Prime Minister Silvio Berlusconi touches his face after delivering a speech to the senate in Rome
The downgrade is more bad news for BerlusconiImage: AP

As if Italy didn't have enough problems with its high unemployment, mountain of debt, stalled economy and a leader more focused on his legal troubles than on guiding the country. Now the credit rating agency Moody's has downgraded the country from Aa2 to A2 and is forecasting a negative outlook.

As a result, Italy's already dangerously high borrowing costs to help pay off its debt will likely rise. And that may put the finances of Italy and Europe in further jeopardy.

A sign for Moody's in New York
Moody's evaluation of Italy was not optimisticImage: AP

It's the second downgrade for Italy in less than a month. Moody's rival Standard & Poor's also cut the country's credit rating, prompting the European Central Bank to buy up billions of euros worth of Italian bonds, in order to keep their interest rate down. Italian Prime Minister Silvio Berlusconi blamed that downgrade on a media campaign against him. This one, he said, was expected.

"The Italian government is working with its utmost effort to achieve its objectives on the state budget. Those very objectives have been greeted positively by the European Commission," Berlusconi said in a short statement released just a few hours after the downgrade.

Last month, Italy's government put in motion an austerity plan worth 54 billion euros ($72 billion). Italian leaders hope to balance the budget by 2013. Italy's current deficit of 3.8 percent isn't really the problem, however. It's the country's total debts, which, at 1.9 trillion euros, are the highest in the eurozone after Greece's.

Banks to face difficulties

Moody's cited a lack of confidence among investors in the country as a reason for the downgrade.

"The fragile market sentiment that continues to surround the euro area sovereigns with high levels of debt implies materially increased financing costs and funding risks for Italy," Moody's said. "Although future policy actions within the euro area could reduce investors' concerns and stabilize funding markets, the opposite is also increasingly possible."

The headquarters of UniCredit Bank in Milan, Italy
Italy's banks may face new difficulties, with higher borrowing costsImage: AP

Experts say as a result of the latest credit rating cut, Italy's large and traditional stable banks will likely find it harder and more costly to borrow. Banks are seen to be only as strong as the governments that stand behind them, and in Italy's case, the Berlusconi-led government is considered increasingly weak and fractured.

Roberto D'Alimonte, a professor of Italian politics, told Deutsche Welle that Berlusconi didn't recognize the seriousness of Italy's crippling debt - more than twice the country's gross domestic product - until it was too late. As a result, D'Alimonte said, Berlusconi failed to make changes that could have led to desperately needed growth in the economy.

"He has not liberalized, as he had promised, and he has not privatized," said D'Alimonte, adding that Italy's bloated public sector must be addressed.

The strongest, albeit indirect, criticism of Berlusconi's handling of the economy came from his finance minister, Giuliano Tremonti. When asked why countries in similar economic trouble weren't downgraded, Tremonti said "the difference between Spain and Italy is that in Spain they have announced elections, which shows an openness to change and a future."

If elections were held today, polls suggest they would likely usher in a new government.

Author: Megan Williams, Rome / hf
Editor: Michael Lawton