The move is a warning of a deteriorating growth outlook and damaging political uncertainty. Standard and Poor’s downgraded Italian debt from A+/A-1+ to A/A-1 and kept its outlook on negative, sending the euro more than half a cent lower against the dollar.
The agency, which put Italy on review for downgrade in May, said that the outlook for growth was worsening and there was little sign that prime minister Silvio Berlusconi‘s fractious centre-right government could respond effectively.
Mr Berlusconi’s office has insisted the government has a solid majority; his administration recently passed measures to get a tighter grip on public finances through a package of tax increases and budget cuts.
Under mounting pressure to cut its 1.9tr euro debt mountain, the government pushed through a 59.8bn euro austerity plan last week, pledging to balance the budget by 2013.
There is such an amount of bad news that the market did not really react on the downgrade of Italy. Robert Halver
But there has been little confidence that the much-revised package of tax hikes and spending cuts, agreed only after repeated chopping and changing, will do anything to address Italy‘s underlying problem of persistent stagnant growth.
The news has not immediately dented European markets. “There is such an amount of bad news that the market did not really react on the downgrade of Italy,” said Robert Halver, Head of Market Research Baader Bank at the Frankfurt Stock Exchange.
In August America’s credit rating was also downgraded by S&P. As Channel 4 News Economics Editor Faisal Islam wrote, it means “S&P ranks Guernsey as a safer debtor than the US”.