Standard & Poor's show: Italy's debt downgraded

Silvio Berlusconi's more cower than bunga after S&P cuts Italy's credit rating by a point.

by Emma Haslett
Last Updated: 06 Nov 2012

Italy has become the latest country to have its sovereign debt downgraded: according to Standard & Poor’s, the credit ratings agency that decided on the downgrade, it’s because attempts by the eurozone’s third-largest economy to contain its burgeoning debt levels haven’t stood up to scrutiny. S&P cut Italy’s short- and long-term sovereign credit ratings from A+/A-1+ to A/A-1 (which does, in fairness, look more like a maths equation than a credit rating) – and while it’s not the first time Italy’s been downgraded over the last few months, it does suggest that things in the eurozone are beginning to look decidedly bleak…

Naturally, Italian prime minister Silvio Berlusconi spluttered his outrage over the news, saying that the decision ‘appears to have been more dictated by newspaper backchat than by the reality on the ground’ (given the fact he controls most of Italy’s media, you’d have thought any newspaper backchat would come straight from him). But with debt equating to 120% of GDP, S&P is adamant that the Italian government’s much-maligned attempt at an austerity budget was inadequate. ‘What we view as the Italian government’s tentative policy response to recent market pressures suggests continuing future political uncertainty about the means of addressing Italy’s economic challenges,’ it said. That told Berlusconi…

The suggestion here is that Italy is heading the same way as Greece: into a series of bailouts which could result in a default on its debt. And any default by Italy would be far worse than Greece: after all, it’s the eurozone’s third-largest economy, and more countries are exposed to Italian debt than they are to Greek debt. So the knock-on effect of any bailout would be much more wide-reaching.

After yesterday’s drama, markets can be forgiven for wanting a day of calm – so it’s no surprise that their response to the decision has been little more than a sigh and a shrug. And, given Italy’s recent troubles, it didn’t exactly come as a shock, either. While Milan’s bourse fell by 1% before promptly regaining its loss, the FTSE 100 rose 28 points, Germany’s Dax rose 1.3% and the Cac in Paris was up 0.8%. Admirably calm – although don’t expect that to last if (/when) credit ratings agency Moody’s follows S&P’s lead and downgrades Italy’s rating. That’s widely expected to happen sooner, rather than later.

So let’s hope talks to avert a default by Greece are productive, eh? The country is back in negotiations with the ‘troika’ (aka the International Monetary Fund and various European authorities) after a ‘productive and substantive’ three-hour session yesterday. The idea is to agree on conditions which will allow it to get its hands on the €8bn (£7bn) it needs to avert a default on its debts. Although it’s not clear whether that will be a cure for Greece’s debt woes, or (more likely) just another temporary measure to ease its pain.

- Image credit: Flickr/ghostofgoldwater

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