• Italy's Mario Monti has been warning his partner's about his country's high borrowing costs (Photo: ec.europa.eu)

Italy debt rating downgraded

13.07.12 @ 09:17

  1. By Honor Mahony
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BRUSSELS - US ratings agency Moody's has cut Italy's debt rating by two notches citing a contagion risk from Spain and Greece as the eurozone crisis continues to rage.

"The risk of a Greek exit from the euro has risen, the Spanish banking system will experience greater credit losses than anticipated, and Spain's own funding challenges are greater than previously recognized," the agency said in an accompanying explanatory note.

"Italy's near-term economic outlook has deteriorated, as manifest in both weaker growth and higher unemployment."

The country's rating was cut two notches to Baa2 from A3, two levels above junk status.

Moody's, one of the three most influential agencies, suggested that growth in the eurozone's third largest economy will contract by 2 percent in 2012 making it more difficult to achieve its fiscal targets.

More broadly, it casts doubt on whether the eurozone's two bailout funds - the temporary EFSF and the permanent ESM - have enough firepower to do all that may in future be required of them.

These doubts undermine the fragile agreement reached at the June EU leaders' summit to eventually allow both funds to buy up government bonds on the open market, in a bid to lower both Spain and Italy's borrowing costs.

Moody's also alludes to the deteriorating political climate with elections due in 2013 and some Italian politicians keen to exploit the population's weariness with austerity measures.

Prime Minister Mario Monti, in office since November, has passed €20 billion in austerity measures and reformed the country’s pension system.

The rating agency's move is yet another blow to eurozone leaders who have struggled to get on top of the crisis for over two years.

The last meeting of EU leaders was considered something of a breakthrough as they agreed to allow the funds greater operational room - including making purchases on the open markets and direct bank recapitalisation.

But the by-now traditional rally and the slump of markets directly after the summit reflected all the caveats contained in the agreement.

Spain was the first country to be affected by the summit's less-than-clear conclusions. The fourth largest eurozone economy, also suffering punishing borrowing costs, wants its struggling banks to be directly recapitalised by the funds to keep the debt off the state's book.

However, this is only due to happen once a European banking supervisor is in place - something not set to be agreed before the end of the year.

For now, Madrid is due to receive €30bn at the end of July from its euro partners. It is due a second pay-out of €45bn by mid-November, reports AFP, citing an official document on the Dutch finance ministry's website.

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