Updated on
Summary Italy's economy is bigger still, behind only Germany and France in the eurozone.
US ratings agency Moodys downgraded Italys government bond rating by two notches, citing the knock-on effects of a possible Greek exit from the eurozone and Spains banking woes.In reducing the rating to Baa2 from A3, Moodys said Thursday that Italy was now more likely to experience a further sharp increase in its funding costs or the loss of market access for borrowing to service its budget. The move lowered Italys rating to two notches above junk-bond status, and came just before the debt-laden country attempts Friday to raise 5.25 billion euros ($6.4 billion) in a medium- and long-term government bond auction.Earlier Thursday Italy raised 7.5 billion euros in one-year bonds at a sharply lower rate than previously, indicating improved investor confidence. But in a statement, Moodys Investors Service spelt out the challenges both external and internal that face the eurozones third-biggest economy.The risk of a Greek exit from the euro has risen, the Spanish banking system will experience greater credit losses than anticipated, and Spains own funding challenges are greater than previously recognized, it said.Italys near-term economic outlook has deteriorated, as manifest in both weaker growth and higher unemployment, which creates risk of failure to meet fiscal consolidation targets.Failure to meet fiscal targets in turn could weaken market confidence further, raising the risk of a sudden stop in market funding, it said, reaffirming a negative outlook for Italian debt.Moodys stressed that Italy did have some strengths: a primary budget surplus not counting interest payments on its cumbersome debt, a diverse economy, and the technocratic governments determination to enact reforms. But the shorter term picture is clouding across the eurozone with Spain the biggest member yet to receive bailout funding. An EU credit line worth 100 billion euros is now available for its distressed banks.Italys economy is bigger still, behind only Germany and France in the eurozone, and Moodys noted that any EU bailout mechanism would be stretched to breaking point should Rome require emergency funding of its own.On June 29, EU leaders reached an agreement to enable two rescue funds -- the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) -- to assist flailing economies. But Moodys said there is a limit to the extent to which these support mechanisms can be used to backstop such a large, systemically important sovereign debtor such as Italy.
