October 5, 2011

Moody’s Slices Italy's Credit Rating

Drops rating by three notches, warns other countries may also suffer

Italy got hammered Tuesday by Moody’s, which lowered the country’s credit rating from Aa2 to A2, with a negative outlook, citing weak growth as the reason. This followed Standard & Poor’s downgrade of the country in September, a move that had taken the country by surprise, as previously reported by AdvisorOne. It was the first time Moody’s had taken such an action against Italy in almost 20 years.

Bloomberg reported that Moody’s also warned that other less-than-Triple-A-rated countries in the eurozone could find themselves in for downgrades in the ongoing European debt crisis as “a profound loss” in investor confidence pressures their market viability. Of the 17 eurozone countries, 11 carry ratings of less than Triple-A; Austria, Finland, France, Germany, Luxembourg and the Netherlands are the lucky top-graded nations.

In a statement, Moody’s said of the potential for additional eurozone downgrades, “There has been a profound loss of confidence in certain European sovereign debt markets, and Moody’s considers that this extremely weak market sentiment will likely persist. It is no longer a temporary problem that might be addressed through liquidity support, and several euro-area governments are increasingly affected by the loss of confidence.”

It added that eurozone countries “will at some point have to choose between increasing the level of mutual support and managing further defaults. The former option is the one that euro-area policy makers are more likely to adopt.”

Prime Minister Silvio Berlusconi’s office was reported to say of the Italian ratings change that it “was expected. The Italian government is working with the utmost commitment to meet its budget targets.” The government may be in for a bit more turbulence than usual over the downgrade, however, since it was reported that Giulio Tremonti, the country’s finance minister, knew beforehand of the downgrade and did not notify Berlusconi—who then alleged that Tremonti planned to use the Moody’s action against him.

Alexander Kockerbeck, a Frankfurt, Germany-based sovereign debt analyst with Moody’s, cited several reasons for the Italian downgrade, including “increased funding risks for euro area sovereigns in general, such as Italy, with high levels of public debt,” and the risk of slower growth “due to macroeconomic structural weaknesses, and on top of that, a weakening global growth outlook.”

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