Monday, September 19, 2011

S&P Downgrades Italy, with Negative Outlook (Video) *Large Debt: Too Big to Bail Out*

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Italy is the third largest economy in Europe, behind Germany and France

S&P Downgrades Italy Standard and Poor's has downgraded the long-term sovereign debt of the Republic of Italy to A from A+ with a negative outlook. S&P stated, "The downgrade reflects our view of Italy's weakening economic growth prospects and our view that Italy's fragile governing coalition and policy differences within parliament will likely continue to limit the government's ability to respond decisively to the challenging domestic and external macroeconomic environment. We think that the government's projection of 60 billion euros [$81.6 billion] of savings may not come to fruition". The action was unexpected, although S&P had placed Italy on negative outlook on May 20, 2011. This action heightens the fear of contagion of the EU Sovereign Debt Crisis.

Too Big to Bail Out Italy has the third largest economy in Europe. Italy's debt of $2.6 trillion is larger than the combined debts of Greece, Spain, Portugal, and Ireland. Further, Italy's debt is 120% of GDP. Spain, Ireland, Portugal, Cyprus, and Greece are European countries that previously received ratings cuts in 2011. The S&P rating of A assigned to Italy is still 5 levels above junk, but is lower than Fitch or Moody's ratings. Moody's Investor Service stated last week the negative review of Italy would be completed in about a month. Italy had previously convinced the European Central Bank to begin purchasing Italian bonds to reduce Italy's borrowing costs.

Slow Economic Growth S&P noted, "In our opinion, the measures included in and the implementation timeline of Italy's National Reform Plan will likely do little to boost Italy's economic performance, particularly against the backdrop of tightening financial conditions and the government's fiscal austerity program".

S&P Cuts Italy's Debt Rating (September 19, 2011) Standard & Poor's Ratings Services on Monday cut Italy's sovereign-debt rating a notch, saying the Mediterranean nation's weak economic growth and fragile government coalition will make it harder to head off the growing crisis sweeping the euro zone. The news represents a fresh setback for the currency zone's third-largest economy, which has wrestled with the effects of a widening European debt crisis and more than a decade of tepid domestic growth. S&P now rates Italy at A, five steps above junk territory. Its outlook is still negative, reflecting weakening economic growth prospects and government divisions that will likely limit the Italian Parliament's ability to respond decisively to those challenges. The ratings firm said Italy's weakness in its -political- and -debt- criteria mostly drove the downgrade, adding that more subdued external demand, government austerity measures and upward pressure on funding costs will likely push economic growth below the base projections S&P made in May, when the ratings firm lowered the country's outlook. Slow growth since then will make it more difficult for Italy to meet the revised fiscal targets set earlier in the year. Moody's Investors Service on Friday maintained its negative review on Italy's sovereign debt rating, saying it will likely need another month to evaluate the country's credit-worthiness. Moody's still rates Italy at Aa2, the third-highest sovereign-debt rating.

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