Standard & Poor’s has cut Italy’s credit rating in a move that buffeted stock markets and the euro, and underlined how the eurozone’s third-largest economy is being sucked deeper into the sovereign debt crisis.
S&P on Monday downgraded Italy by one notch to A with a negative outlook, meaning further downgrades are possible. The move – S&P’s first downgrade of Italy since 2006 – places S&P’s rating on Italy three notches below that of Moody’s, the rating agency that many had expected to cut first. Moody’s on Friday said it was extending its review of Italy’s finances.
Silvio Berlusconi, Italy’s prime minister, on Tuesday denounced the move as divorced from reality and politically motivated.
“The assessments by Standard & Poor’s appear dictated more by newspaper articles than reality and appear to be tainted by political considerations,” Mr Berlusconi said.
Markets mostly shrugged off the downgrade after early jitters. Italy’s benchmark 10-year bond yields rose 8 basis points to 5.66 per cent, having been as high as 5.80 per cent earlier in the session. The euro rose 0.3 per cent to $1.371 after falling against the dollar immediately after the downgrade.
Milan’s FTSE MIB stock index was up 1 per cent with UniCredit and Intesa Sanpaolo, two of Italy’s largest banks, also higher.
S&P cited Italy’s “weakening economic growth prospects” and the difficulty of the “fragile governing coalition” being able to “respond decisively” to the crisis.
The downgrade once again thrusts Rome into the centre of the eurozone crisis, coming after several days of intense worry about the prospect of an imminent Greek default.
“This is a downgrade of EU and Italian politicians,” said Sony Kapoor, head of Redefine, a Brussels-based economic think-tank. “The miserable failure of EU leaders to tackle the problems posed by Greece does little to inspire any confidence that the much larger and more urgent problems faced by Italy would be managed any better.”
Italy’s borrowing costs have risen steadily in recent weeks despite the European Central Bank buying its bonds. Its 10-year bond yield closed at 5.59 per cent on Monday, down from its August peak of 6.4 per cent, but well above the 4.9 per cent it reached when the ECB started its purchases. Italy has the largest bond market in Europe and the third-largest in the world behind the US and Japan.
The S&P downgrade is likely to raise further fears over the European banking system, whose shares have been under heavy pressure for several months. Many large French and German banks have big exposures to Italy.
“Without full confidence in the creditworthiness of Italy, it’s impossible to have full confidence in the solvency of the European banking system,” Mr Kapoor said.
S&P also cut its forecast for economic growth in Italy to 0.7 per cent for each year until 2014, from its previous estimate in May of 1.3 per cent. At that time, the rating agency said there was a one-in-three chance that Italy would be downgraded by 2013.
It also raised its estimates for Italy’s debt levels, assuming they would peak next year at 122.4 per cent of GDP – the second-highest in the eurozone, behind Greece. Under S&P’s negative scenario, Italy would slip into a recession next year with debt to GDP peaking at 123.9 per cent.
Italy unveiled a new austerity programme earlier this month in a bid to calm turbulent markets. But S&P expressed scepticism about the plan, saying the €60bn in cuts “may not come to fruition” in part because it expects Rome’s market interest rates to rise.
The downgrade may also spark a renewed outcry from European politicians over rating agencies. The European Commission has threatened the agencies with a third round of regulation since the financial crisis and talk has increased of setting up an “independent” European rating agency, something seen with cynicism by many in banks and the markets generally.