Italy has had its credit rating cut from Aa2 to A2 with “a negative outlook” by the credit rating agency Moody’s. The company cited a “material increase in long-term funding risks for the euro area” and a loss of confidence in debts for the eurozone. This has happened even though Rome has low borrowing needs and low private-sector debt, with markets against the euro.
Balancing the Budget
The Italian Prime Minister, Silvio Berlusconi had expected the decision, saying, “The Italian government is working with the maximum commitment to achieve its budget objectives.” The European Commission has approved the government’s plan to balance its budget by 2013.
Initially, the markets did not react to the credit slashing. Half an hour after the New York Stock Exchange closed to trading, the information broke out. However, after-hours trading implied that 1% had been lost. In Asian trading, stocks went up after a report that EU finance ministers were recapitalizing European banks. They then received this news, with the Nikkei in Japan closing down by 0.86%. South Korea lost 2.33% while Australia ended 1.40% up.
In Hong Kong and mainland China, the stock markets had been closed for a holiday. However, prices were trading higher in Asia amidst hopes that the world economy would not slow down with the efforts of control from European Authorities. Brent crude rose to $101.62 a barrel for delivery in November.
Italy Could Be a Risk
This move means that banks in Italy are likely to be downgraded in credit ratings as well, with pressure therefore on their borrowing. Banks will find it more expensive if it is thought Italy is a risk, meaning that the banking crisis will move forward. Other eurozone governments, such as Spain, will be concerned, as borrowing costs will have risen in many places.
Moody’s raised concerns about outlook for Italy’s growth, saying that structural economic problems in Italy and the economic slowdown worldwide meant that growth was unlikely. There has been a slow political response to the crisis has been criticized, though it is necessary due to the set up for the European Union. Italy could be downgraded further if they could not pay their large outstanding debt.