Italy’s credit rating is slashed

4 October 2011 Last updated at 17:35 ET

The Italian government’s credit rating has been slashed by Moody’s from Aa2 to A2 with a negative outlook.

The ratings agency blamed a “material increase in long-term funding risks for the euro area”, due to lost confidence in eurozone government debts.

Despite Rome’s low current borrowing needs, and low private-sector debt levels in Italy, Moody’s said market sentiment had turned against the euro.

Prime Minister Silvio Berlusconi said the decision was expected.

‘Implementation risks’

The downgrade is likely to be followed by similar cuts in the credit rating of Italy’s banks, which would put severe pressure on their ability to borrow.

“This downgrade will make it even harder for Italy to borrow,” says BBC business editor Robert Peston. “However, that is not the worst of it.

“If Italy is looking like a more risky place to lend, its banks… will find it harder and more expensive to borrow. The [eurozone] banking crisis will be exacerbated.”

Moody’s also raised warnings about Italy’s growth outlook, citing structural economic problems within the euro, as well as a global economic slowdown.

Another problem noted by the rating agency was what it called political and economic “implementation risks”.

“The question is, if [eurozone governments] will move fast enough… to really put in place a credible solution,” says Robert Peston.

An expansion of the eurozone’s bailout fund already agreed by the euro’s 17 governments in July – which is now seen by markets as inadequate – has still yet to be ratified by all 17 national parliaments.

The slow response to the emerging financial necessitated by the European Union’s institutional set-up has been criticised by many commentators, including European Commission President Jose Manuel Barroso, as a major impediment to tackling the crisis.

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