Debt: S&P Downgrades Italy, More Pressure on Euro Zone

Standard and Poor's downgrades Italy's credit rating

Standard and Poor’s downgrades Italy’s credit rating

In a surprise move that analysts are calling a grim sign for the global economy, Standard & Poor’s downgraded Italy’s credit rating on Tuesday. The downgrade, which occurred because of poor growth and political instability according to S&P, serves to put more pressure on an already shaky euro zone economy.

Italian response

Italian Prime Minister Silvio Berlusconi said that his administration is already in the middle of preparations for spurring new growth, and that S&P’s credit downgrade did not reflect the reality of Italy’s potential.

The Italian government pushed through a 59.8 billion euro austerity plan last week to cut its debts. The plan, a combination of budget cuts and tax hikes that was passed after much revision, unfortunately does little to spur global confidence that Italy will be able to manage balance its budget by 2013 as promised.

It also did little to impress Standard & Poor’s, which released a statement about its actions concerning Italy: “We believe the reduced pace of Italy’s economic activity to date will make the government’s revised fiscal targets difficult to achieve.”

The one-notch S&P downgrade made Italy A/A-1 from A+/A-1+, 3 notches above Italy’s current rating at rival firm Moody’s. Forecasts predicted Moody’s was much more likely to downgrade Italy first, but the firm stated it will take another month for them to reach their decision.

Progress in Greece

The frenzy over the sovereign debt crisis across the euro zone centers around Greece, which has pledged to cut public spending but may still run out of money within weeks if international lenders do not intervene.

Kathy Lien, director of currency research for GFT, called Italy “a much bigger deal than Greece,” and it shows: the pressure from the downgrading of Europe’s third-largest economy has overshadowed the signs of progress coming from Greece.

Brazil has said it may allow $10bn of the country’s money to help Greece through organizations like the International Monetary Fund or the purchases of bonds. The South American country has also stated that it is in talks with other large emerging economies – often shortened BRICS, or Russia, India, China, and South Africa – to provide similar support to Europe.

Though these emerging countries are traditionally risk-averse, this could be a useful move for their economies, as the most recent World Bank figures report that slumps in advanced economies like the US and Europe are hurting developing economies worldwide.

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