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.
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+.
"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.