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S&P’s downgrade heightens Italy’s woes

Berlusconi accuses S&P’s of acting on ‘political considerations and says he is preparing measures to boost growth

Silvio Berlusconi lashed out at Standards & Poor’s on Tuesday after the ratings agency downgraded Italy and criticised the coalition government for failing to implement measures to cut spending and boost growth.

The prime minister accused S&P of being influenced by “political considerations that seem dictated more by newspaper stories than by reality”. He said he had a secure parliamentary majority and was preparing measures to boost growth which would bear fruit in the short to medium term.

S&P downgraded Italy from A+ to A with a negative outlook, after it said a decline in domestic and export demand combined with a rise in government costs and austerity measures would lead to lower growth. It said a proportion of the €60bn (£52bn) of savings passed by parliament last week were unlikely to materialise because they relied heavily on higher taxes. S&P said said Rome’s €60bn of cuts would do little to shrink a €1.9tn debt pile – equivalent to 120% of national income.

S&P’s criticisms came as the boss of arguably Italy’s most important company, Fiat, said the government needed to change course. Sergio Marchionne said the country must “reinforce” its commitments to balancing its budget to convince investors it is “serious.”

Marchionne added: “The time for nebulous, unspecified and non-detailed commitments is gone. The whole question about austerity is crucial.”

Emma Marcegaglia, head of the business lobby group Confindustria, said Italians were “fed up with being an “international laughing stock”, and added that the need for a radical change of direction in economic policy was “truly a question of hours and days”.

The S&P downgrade pushed the cost of borrowing for the Italian government to more than 5.7% for 10-year loans. The cost of insuring against an Italian default also jumped, with Italian five-year credit default swaps above the psychologically important 500 level at 515 basis points, according to financial data firm Markit.

“Italy is now struck in a self-fulfilling downward spiral from which it is unlikely to be able to extract itself without external help,” said Sony Kapoor, of Brussels-based thinktank Re-Define, referring to moves by the European Central Bank to increase lending to Italy.

“Without full confidence in the credit-worthiness of Italy, it’s impossible to have full confidence in the solvency of the European banking system,” he said.

A former Berlusconi minister, Rocco Buttiglione, who now sits with the opposition, said the continuation of the government was “costing Italy billions of euros”, because its political weakness was increasing the treasury’s borrowing costs.

The International Monetary Fund added to the gloom with a prediction that growth would slow to 0.6% in 2011 and 0.3% in 2012. The global lender of last resort urged the government to make growth-boosting measures a priority along with balancing the budget. Several economists, including the award winning Princeton professor Paul Krugman, have argued that calls for a government stimulus and austerity at the same time are contradictory and self-defeating.

In an article for the New York Times, he said implementing austerity was the 21st century equivalent of doctors “bleeding” patients to cure their ills. He urged politicians to learn the lessons of economic history as doctors had learned that extracting blood from a patient made a recovery less likely.

Switzerland joined victims of the eurozone crisis after it downgraded growth forecasts for growth to 2.1% and 1.5% this year and next, respectively. The government said its safe haven status had encouraged a huge influx of foreign exchange, which had pushed up the value of the Swiss franc and dented export levels.

The central bank has spent billions of francs on depressing the value of the currency, which fell again on Tuesday on rumours it would attempt a second round in an attempt to peg the franc at €1.25, up from the current rate of €1.20, making the franc less valuable relative to the euro, dollar and other currencies. © 2011 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds