Italy’s already concerning borrowing costs could be set to rise after the country’s government debt rating was downgraded to Baa2 by Moody’s Investors Service. The agency then warned that this grading, although only two notches above junk status, could be further reduced. Moody’s assessment of Italy’s current economic viability is lower than that assigned to the country by the other major ratings agencies Fitch Ratings and Standards & Poor’s Rating Services. Italian politicians and executives have previously condemned the three agencies past rating action after downgrades forced up the country’s borrowing costs.
Moody’s cited that the reasons behind this week’s decision were the persistent euro-zone troubles, Italy’s increased liquidity risks and the country’s continuing economic deterioration.
Moody’s stated that; ‘Italy’s government debt rating could be downgraded further in the event there is additional material deterioration in the country’s economic prospects or difficulties in implementing reform […] Should Italy’s access to public debt markets become more constrained and the country were to require external assistance, then Italy’s sovereign rating could transition to substantially lower rating levels’. They further stated that Italy was increasingly susceptible to the type of political event risk prevalent in Spain and Greece. Due to its 2 trillion euro public debt and increasing borrowing needs, Moody’s felt that Italy’s funding problems were only set to grow.
With investor confidence already shaken by recent developments in Spain, this stark evaluation has the potential to destabilize Prime Minister Mario Monti’s attempts at using structural reform to shift market sentiment.
With Italy attempting to sell 5.25 billion Euros in medium-term bonds later today the timing of this announcement could hardly be worse. After Moody’s delivered their rating the euro fell by roughly quarter of a cent.