Italy passed a market test on Friday after a Moody’s downgrade that its industry minister called unjustified. After yields at a bond sale fell well below 5%, only hours after Moody’s had cut the country’s sovereign debt rating to two notches above junk, the head of the Italian business association Confindustria, Giorgio Squinzi, said Italy was stronger than Moody’s thought.
Reuters reported Friday that Moody’s cut Italy’s rating two notches, to Baa2, and warned that it could lower it even further. While markets were rattled by the action, apparently investors were not so upset that they failed to see opportunity; they snapped up three-year bonds at an auction just a few hours later at lower yields than Italy has seen since May.
Angry politicians and business leaders criticized the move, with Industry Minister Corrado Passera saying in the report that it was "altogether unjustified and even misleading."
Joining in the criticism, Squinzi was even more voluble, saying, "This is just Moody's opinion. I think our country, and our manufacturing system, is much stronger than the Moody's evaluation suggests. As president of Confindustria, as an employer and as a private citizen, I think our country is stronger than that."
In a statement, Moody’s had said of the ratings action, which came as a surprise to markets, "The negative outlook reflects our view that risks to implementing these reforms remain substantial. Adding to them is the deteriorating macroeconomic environment, which increases austerity and reform fatigue among the population."
It added, "The political climate, particularly as the spring 2013 elections draw near, is also a source of implementation risk."
Technocrat and Prime Minister Mario Monti, who has been spearheading the implementation of austerity policies, has said he will not seek to remain in office past next year at the expiration of his term. The unpopular policies have helped the populist Five Star Movement, led by the comedian Beppe Grillo, to gain substantial support.
To further complicate Italy’s political situation, former Prime Minister Silvio Berlusconi has said he will return to politics representing the center right. Lately his rhetoric has taken an anti-European cast as he criticized Monti’s austerity policies, and Berlusconi has also begun to question whether Italy should remain in the euro.
BNP Paribas analyst Luigi Speranz commented in the report, “Berlusconi seems to have picked up on the increased sense of frustration within the Italian society that the sacrifices being made by the country are not being sufficiently recognized by the markets and that part of the blame lies in the slow EU policy response."
Earlier in the week, Monti had mentioned the possibility that Italy would seek to draw on eurozone bailout funds as a way to finance sale of its bonds, in a move that would lower yields. Moody’s had said such an action could cause it to issue another downgrade.