Italy's bond rating downgraded
Berlusconi says the Moody's decision to cut bond ratings by three notches was expected.
Last Modified: 05 Oct 2011 03:03

Italian PM said Moody's decision was expected and reiterated government was committed to its budget goals [EPA]

Credit ratings agency Moody's has downgraded Italian government bonds from "Aa2" to "A2" with a negative outlook, citing risks for the financing of long-term debt and slow economic growth.

"The negative outlook reflects ongoing economic and financial risks in Italy and in the euro area," the agency said in a statement on Tuesday.

It also said that an uncertain market environment and a risk of further deterioration in investor sentiment could constrain the country's access to public debt markets.

"If such risks were to materialise and the long-term availability of external sources of liquidity support were to remain uncertain, the country's rating could transition to substantially lower rating levels."

While the change moves the rating down three notches, it's still investment grade. Despite its decision to downgrade Italian debt, Moody's, unlike many other observers, insisted that "a default by Italy remains remote," retaining its short-term rating at Prime-1.

Silvio Berlusconi, Italy's prime minister, said Moody's decision was expected and reiterated that the government was committed to its budget goals.

"The Italian government is working with the maximum commitment to achieve its budget objectives," he said adding that its plans, including a target to balance the budget by 2013, had been welcomed and approved by the European Commission.

The action follows the September 19 one-notch downgrade by Standard & Poor's Ratings Services, which cut country's long- and short-term sovereign credit ratings to "A/A-1" from "A /A-1 ”.  That rating is still five steps above junk status.

The European Central Bank had demanded stiff austerity measures but doubts persist about how serious Italy is about coming to grips with its debt.

Italy has an enormous debt of more than 1.9tn euros ($2.5tn), which comes to about 120 per cent of the country's output.

Dexia rescue

In another eurozone-related development, France and Belgium rushed to the aid of Dexia SA on Tuesday in what would be the first state rescue of a European bank in the euro zone sovereign debt crisis.

The lender to hundreds of French and Belgian towns, which also needed propping up after the 2008 financial
crisis, will have its French municipal finance arm broken off and put under the ownership of French state banks.

Dexia got a government and shareholder bailout in late 2008 when it ran into trouble with its US bond insurance unit, FSA, during the US subprime crisis. Holders of bonds based on those mortgages suffered heavy losses.

Dexia, however, was not the only European bank facing a need for capital.

Banks face a 148bn euro capital shortfall under a base case and a 227bn euro shortfall under a stressed scenario, according to analysts at JPMorgan, who say Unicredit, Deutsche Bank (DBKGn.DE), Lloyds, Societe Generale and Barclays each face a deficit of more than 7bn euros under its stressed scenario, the Reuters news agency reported.

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