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Italy downgrade deepens fears over euro debt crisis

Ratings agency Moody’s slashes Italy debt rating by three points, increasing pressure on European governments trying to contain financial crisis

Bernanke says US economy is ‘close to faltering’

Italy’s sovereign debt rating has been cut for the second time in as many weeks, with ratings agency Moody’s citing “sustained and non-cyclical erosion of confidence” as it slashed its forecast for the country.

In a report released after US stock markets closed on Tuesday, Moody’s downgraded Italy’s government bond ratings from Aa2 to A2 with a “negative outlook”, suggesting further cuts could be to come. The move threatens to increase Italy’s cost of borrowing, and will add yet more pressure to European finance ministers now wrestling with a financial crisis that has spread across the continent.

Italy’s prime minsiter Silvio Berlusconi criticised Moody’s rival Standard & Poor’s when it cut Italy’s credit rating last month, saying the ratings agency’s action was “dictated more by newspaper stories than by reality”.

In its report, Moody’s said the decision had been driven by three main factors: the debt crisis, which was causing a “sustained and non-cyclical erosion of confidence” in Europe and increasing “long-term funding risks” for Italy; the increased downside risks to economic growth due to macroeconomic structural weaknesses; and a weakening global outlook.

“The implementation risks and time needed to achieve the government’s fiscal consolidation targets to reverse the adverse trend observed in the public debt, due to economic and political uncertainties,” Moody’s said.

The Italian government said in a statement that the decision was expected, and reiterated its pledge to balance its budget.

Italy last month approved a €54bn package of austerity measures aimed at eliminating the country’s budget woes and that it hoped would stave off a Moody’s downgrade. The pledge to cut government spending and raise taxes met with cautious approval from Brussels, the European Central Bank and the International Monetary Fund but has not appeased Moody’s.

“Even if policy actions were to succeed in the short term in returning some degree of normality to euro area sovereign debt markets, the underlying fragility and loss of confidence is deep and likely to be sustained,” Moody’s said in its report.

“The Italian economy continues to face significant challenges due to structural economic weaknesses. These problems — mainly low productivity and important labour and product market rigidities — have been an impediment to the achievement of higher potential growth rates over the past decade and continue to hinder the economy’s recovery from the severe recession it experienced in 2009,” said Moody’s.

“These structural impediments to economic growth cannot be removed quickly. The government’s reform plans have only just started to address some of these structural challenges, and they need to be implemented efficiently.

Moreover, moderate medium-term growth prospects for the Italian economy have been further revised downwards due to potential adverse effects of a weakening European and global growth outlook.”

Italy’s latest downgrade follows cuts for eurozone partners Spain, Ireland, Greece, Portugal and Cyprus. The news came after reports that European finance ministers were forging ahead with plans to support Europe’s weakening finance sector, news that had cheered US markets before they closed.

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