Pressure mounts on Italy as S&P cuts credit rating

STANDARD and Poor’s added to mounting pressure on Italy yesterday with a one-notch cut to its credit rating that hit eurozone markets and prompted calls for Silvio Berlusconi’s government to resign.

S&P cut its ratings on the eurozone’s third largest economy to A/A-1 from A+/A-1+, judging it less credit-worthy than Slovakia, and kept its outlook on negative, warning of a deteriorating growth outlook and damaging political uncertainty.

Berlusconi’s coalition has been plagued by infighting and policy disagreements as well as the prime minister himself battling a widening prostitution scandal.

But he lashed out at S&P, saying its move seemed influenced by “political considerations”. He said he had a secure parliamentary majority and was preparing measures to boost growth.

The IMF yesterday cut Italy’s growth forecasts to just 0.6% in 2011 and 0.3% in 2012, as it urged the government to make growth-boosting measures a priority along with balancing the budget.

The euro fell more than half a cent against the dollar after the S&P move, before picking up following some reassuring signs from Greece, but bond yields hovered within sight of levels which prompted the European Central Bank to step into the market and buy Italian bonds.

Nicholas Spiro, managing director of London-based consultancy Spiro Sovereign Strategy, said: “This is a confirmation that the world’s third-largest bondmarket, and the eurozone’s third-largest economy, is in danger of succumbing to a self-fulfilling loss of confidence.”

S&P, which put Italy on review for downgrade in May, said the outlook for growth was worsening and Berlusconi’s fractious centre-right government had not shown it could respond effectively.

S&P will decide within 18 months whether to downgrade Italy again, though its head of European sovereign ratings Moritz Kraemer said that the current turbulent times meant decisions could come faster.

Spain showed a faster and more cohesive policy reaction than Italy to rising bond yields over the summer, Kraemer said, underscoring Italy’s political difficulties that were a key reason for the downgrade.

“We think funding costs are likely to go up... we do not, for a single A sovereign, anticipate that the markets will be shut completely,” Kraemer said, adding that he saw Italian default as an “extremely remote possibility”.

Under mounting pressure to cut its €1.9 trillion debt pile — 120% of GDP — the government pushed a €59.8 billion austerity plan through parliament last week, pledging to balance its budget by 2013.