The Italians Have Been Downgraded

September 20, 2011Marketsby EW News Desk Team



Global markets are bracing themselves for another bloodbath after S&P downgraded Italy. The country is the third largest economy in the eurozone, but also holds the second largest debt in Europe with a debt burden of 120% over its GDP. 

Italy's long term debt rating was cut from A+ to A, the first downgrade since October 2006. According to S&P, the outlook for the Italian market was negative, a sign that the credit rating agency could further downgrade Italy. 

"We believe the reduced pace of Italy's economic activity to date will make the government's revised fiscal targets difficult to achieve," S&P said on Monday.

According to S&P, the downgrade reflects the country's "weakening economic growth prospects" and fears that the "fragile" governing coalition would not be able to implement measures necessary for the country's deepening economic woes. 

"This downgrade had to be expected, given the incompatibility of Italy's rating and its high level of debt to GDP. Italy is still quite creditworthy, and the A rating is still very high even if the outlook is negative," said Carl Weinberg, chief economist at High-Frequency Economics, to the Telegraph

On the other hand, Moody's revealed that it would delay its Italy downgrade decision after an additional 30 days of assessment.

The Italian downgrade has unsettled already nervous investors. Earlier this month, S&P cut the credit rating to the U.S. from AAA to AA+.

Related: S&P Defends US Downgrade, Warns Of Further Downgrade In 6 To 24 Months 

"The sentiment of contagion is definitely stronger than before," Marc Lansonneur, of Societe General Private Banking told the BBC

In Asian trading, the euro fell sharply against both the yen and the dollar, and the wider share markets have moved collectively into the red. 

"This cannot be supportive of the euro. It has to be detrimental. Certainly no one shall be terribly surprised by the decision … The point here is that all the news out of Europe is horrid these dais and this is but another in what shall be a long line of ratings cut for the PIIGS, one at a time," said Dennis Gartman, editor of The Gartman Daily Letter.


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