This weekend the European Central Bank and the continent’s political leaders were unable to hammer out a deal to resolve the precarious debt situation in Greece. This morning Moody’s announced that it will place Italy’s (NYSE:EWI) sovereign debt on review for possible downgrade, largely as a result of the leaders’ failure to strike a deal, and the nation’s high degree of exposure to Greek debt. The Italian debt is currently graded at a rating of Aa2, though analysts at Moody’s (NYSE:MCO) may see that mark fall lower in the coming week’s if the Greek’s finally are allowed to default.
According to one Moody’s analyst, “Italy (NYSE:EWI) has had structural impediments to growth for some time. However, today, these challenges coexist with a scenario of rising interest rates and fragile market sentiment. What we are looking at is the overall resolution of the debt crisis, whether the uncertainty around that issue will be cleared.”
Even removed from its investment in Greek debt, the Italians faces economic issues that have citizens and international shareholders concerned for the country. Italy has a national debt burden that totals 120% of GDP, a mark close to that of Greece. From Reuters, “Italy’s conservative banking system, high levels of private savings and a tight clamp on public spending have largely shielded it from the euro zone debt crisis, but its chronically sluggish growth has made it impossible to cut the debt. In its report, Moody’s said Italy’s economy has long-term structural weaknesses such as low productivity as well as “labor and product market rigidities” that have impeded growth over the last 10 years.”
It is unclear just how destructive a Greek Default would be to Italy’s economy. Moody’s (NYSE:MCO) seems to be looking to err on the side of caution at this point.