S&P Downgrades Italy’s Sovereign Debt Rating

Standard & Poor’s cut Italy’s credit rating late Monday by one level to A from A+, citing weak economic growth and criticizing Rome’s response to the debt crisis. Italian Prime Minister Silvio Berlusconi responded, saying that the move was influenced by “political considerations” and media stories rather than economic reality.

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Markets quickly shrugged off the news, with major indices in Italy, Germany, and London all opening higher this morning. However, Moody’s looks likely to downgrade Italy soon, as the ratings agency currently rates Italy three notches higher than S&P does.

Italy recently passed a very unpopular austerity budget, but Standard & Poor’s said that wasn’t enough. “We believe the reduced pace of Italy’s economic activity to date will make the government’s revised fiscal targets difficult to achieve,” S&P said in a statement.

“Furthermore, what we view as the Italian government’s tentative policy response to recent market pressures suggests continuing future political uncertainty about the means of addressing Italy’s economic challenges.”

Standard & Poor’s criticized the austerity budget’s reliance on tax hikes, saying that taxes were already high in Italy, and that further increases would only weigh on growth. The 60 billion euros of austerity measures laid out in Italy’s budget are the equivalent of 2.8% of Italian economic output.

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Rome hopes to balance its budget by 2013, but the government is now expected to cut its growth forecast for this year from 1.1% to 0.7%. Italian finance minister Giulio Tremonti is meeting with bankers and businessmen to discuss how to boost the country’s growth rate.

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