Credit ratings agency Standard & Poor’s on Tuesday lowered Italy’s sovereign credit rating to BBB from BBB+ and placed its outlook on negative, citing weakening prospects for the eurozone’s third largest economy as it remains stuck in its worst recession since World War 2.
The agency also lowered its GDP forecast for Italy in 2013 to -1.9 percent, compared with an earlier forecast of -1.4 percent.
"The rating action reflects our view of a further worsening of Italy's economic prospects coming on top of a decade of real growth averaging minus 0.04 percent," S&P said in a statement, adding that “there is at least a one-in-three chance that the rating could be lowered again in 2013 or 2014.”
Despite running budget surpluses for most of the last decade, S&P said Italy is having trouble competing with other EU countries because its taxes on capital and labour are higher than tax rates on property and consumption, while wages have become misaligned with underlying productivity trends, dragging down Italy’s overall competitiveness.
Additionally, Italy’s share of the global goods and services market has declined by about a third between 1999 and 2012.
“The low growth stems in large part from rigidities in Italy’s labour and product markets,” said the agency.
Last week, the International Monetary Fund said Italy faces an uphill battle exiting its longest recession in more than two decades and pressed Rome to do more about “unacceptably high” unemployment, especially among young people and women.
The Fund also urged the government to bring back an unpopular property tax, which could raise some 4 billion euros each year, and speed up on reforms and implement long-delayed privatisations.
"Accelerating the momentum for reform will be essential to jumpstart growth and create jobs," it said, warning market sentiment remained "fragile".
However, a source at the Treasury told Reuters that S&P’s decision reflected a backward looking view of the country's position and did not take account of recent measures to boost growth.
"Overall the reasoning isn't justifiable," said the source, who spoke on condition of anonymity. "They emphasize low growth and competitiveness but they don't take account of the government action that has been taken."