The credit rating of Italy has been slashed by the credit ratings agency Standard & Poor’s. This is the latest news in the European sovereign debt crisis, which is clearly deepening. The agency outlined Italy’s outlook as “negative” and downgraded the country from A+/A-1+ to A/A-1.
Reasons for the cut were fears that the country would not be able to cut public spending. Earlier this month, the country had re-evaluated its austerity plans, and S&P feels that it may not be able to bring its finances under control.
A Lack of Faith
In a statement from the credit ratings agency, they said, “We believe the reduced pace of Italy’s economic activity to date will make the government’s revised fiscal targets difficult to achieve.”
This basically shows the lack of faith in the country’s austerity planning, reflecting their attempts to pass an unpopular budget, which was later withdrawn. These fears had been reflected in the volatile markets, which had shown a lack of faith in the eurozone. Italy is the latest country in the eurozone to have its credit rating cut this year, with downgrades in Spain, Ireland, Greece, Portugal, and Cyprus as well.
Despite the reasons, the move had come as a surprise and is likely to further fuel the fears, creating potentially more volatility in the markets. The country has Europe’s second largest level of debt, with the cost rising recently over fears from lenders that Italy may not be able to pay back its loans. Borrowing costs will most likely raise further still after this news.
According to Carl Weinberg, from High Frequency Economics, warned that the knock-on effects of this combined with the potential and likely default from Greece will mean perception of the eurozone gets worse, especially as financial markets are so vulnerable right now. He said, “Perceptions are more important than realities.”
Investors have already become nervous about the downgrade, with the euro falling against the yen and the dollar in Asian markets, and share markets falling as well. Marc Lansonneur, from Societe General feels that the move will increase market volatility, with a lack of trust in the system. Markets had already been down with concern about a potential default from Greece.