Italy Stunned by S&P Downgrade

First cut in five years raises heat on officials in debt crisis

Standard & Poor’s took Italy by surprise Monday night with a cut in its credit rating that put it below Slovakia and on the same level as Malta, with a negative outlook. It was the first such cut in five years, and it increased the pressure on euro zone officials to do something about the spreading debt crisis.

Bloomberg reported that Italy was downgraded to A from A+, which reflects S&P’s belief that the country’s slowing economy, combined with what it called a “fragile” government and increased borrowing costs, would make it hard for Italy to cut its debt. In a statement it said, "We believe the reduced pace of Italy's economic activity to date will make the government's revised fiscal targets difficult to achieve."

Reuters noted that the new rating is three notches below Moody’s rating; Moody’s was expected to lower Italy’s rating before S&P would take action, but said it would wait another month to make its decision. S&P also lowered Italy’s growth outlook to an annual average of 0.7% for 2011 to 2014; its prior projection had been 1.3%.

Prime Minister Silvio Berlusconi criticized the downgrade. While his government passed a 54 billion euro ($74 billion) austerity package earlier in the month that influenced the European Central Bank  to purchase Italian bonds, the plan’s goal of balancing the budget in 2013 did not impress the ratings agency.

Berlusconi was quoted saying, "The assessments by Standard & Poor's seem dictated more by newspaper stories than by reality and appear to be negatively influenced by political considerations," and added that the government was already working on ways to increase growth.

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