A weekend warning by Moody’s about a possible downgrade of Italy’s bond rating brought shock to Italian stocks and raised further fears about Eurozone contagion.
The Milan stock exchange plunged by just over 2% on Monday after the credit rating agency placed Italy’s current Aa2 bond rating on review for a possible downgrade. Moody’s expressed concern about what rising interest rates might do to an economy that is struggling to recover from recession and burdened by heavy debt.
“Italy has so far only recovered a fraction of the nearly seven percentage points in GDP that it lost during the global crisis, despite low interest rates, which are likely to rise in the medium term,” Moody’s said in its announcement. A possible rate hike that the European Central Bank has signaled for July could further burden an economy struggling to extricate itself from structural impediments to growth.
In its warning, Moody’s expressed worry about Italy’s ability to adopt “conservative fiscal policies” at a time when the “government’s electoral support is weakening.”