Concern at 'fragile' Italian Govt forces cut in credit rating

Italy's credit rating was yesterday cut by Standard & Poor's over concern that weakening economic growth and a fragile Government mean the nation won't be able to reduce the euro-region's second-largest debt burden.

The rating was lowered to A from A+, with a negative outlook, S&P said.

It said Italy's net government debt was the highest among A-rated sovereigns, and the company expected it to peak later and at a higher level than it previously expected.

The decision sent the euro sliding for a third day against the dollar as investor concern rises that European policymakers will fail to contain the debt crisis.

Greece plans another call with its main creditors today as it seeks to stave off default, and US Treasury Secretary Timothy Geithner urged the region to adopt extra tools.

"It's a reminder that we've had the market in control but policymakers have been slow to think in any forward-looking context," said Adrian Foster, head of financial-market research for Asia at Rabobank Group in Hong Kong.

"Policymakers across the eurozone have been well and truly asleep at the wheel for quite a while now and are only taking measures when the market pushes them to it."

S&P said it lowered its outlook for Italy's growth to a 0.7 per cent annual average for 2011 to 2014, from an earlier projection of 1.3 per cent.

"We believe the reduced pace of Italy's economic activity to date will make the Government's revised fiscal targets difficult to achieve," it said.

Italy follows Spain, Ireland, Portugal, Cyprus and Greece as eurozone countries having their credit rating cut this year. Prime Minister Silvio Berlusconi passed a €54 billion ($89.6 billion) austerity package this month that convinced the European Central Bank to buy its bonds after borrowing costs surged to euro-era records last month. The plan to balance the budget in 2013 did not sway S&P.

"We expect that Italy's fragile governing coalition and policy differences within Parliament will continue to limit the Government's ability to respond decisively to domestic and external macroeconomic challenges," S&P said.

The decision comes just weeks after S&P stripped the US of its AAA credit rating for the first time.

Italy's downgrade may aggravate a volatile political situation - Berlusconi faces four trials - after a decade with virtually no economic growth that has undermined debt reduction. Its government debt was 119 per cent of gross domestic product last year, more than any euro country after Greece.

Unlike Ireland and Portugal, which followed Greece in seeking bailouts from the European Union and the International Monetary Fund, Italy until July had managed to skirt the worst of the fallout from the debt crisis.

While its budget gap was 4.6 per cent of GDP last year, lower than France and Germany, debt will reach 120 per cent this year.

Italy's economy expanded an average 0.2 per cent annually from 2001 to 2010, compared with 1.1 per cent in the euro area. GDP rose 0.3 per cent in the second quarter from the three months through March, when it grew 0.1 per cent, the National Statistics Institute said.

- Bloomberg