09 July 2013

Reuters: S&P cuts Italy rating, leaves outlook negative

Ratings agency Standard & Poor's cut Italy's sovereign credit rating to BBB from BBB-plus and left its outlook on negative, citing concerns about prospects for an economy stuck in its worst recession since World War Two.

The announcement, which sent the euro lower, came a day before Italy was due to sell €9.5 billion of Treasury bills at auction and two days before a planned sale of up to €6.5 billion of medium- and long-term bonds. "The rating action reflects our view of the effects of further weakening growth on Italy's economic structure and resilience, and its impaired monetary transmission mechanism", S&P said in a statement.

The recession is making it more difficult for Prime Minister Enrico Letta to hit European Union budget targets while meeting demands from his centre-right coalition partners for tax cuts. Letta himself said the rating cut showed that Italy was still far from overcoming the long slump that took the euro to the brink of collapse in 2011.

Successive Italian governments have passed a succession of severe tax hikes and spending cuts to keep the deficit under control and Rome has emerged from the EU's special excessive deficit procedure, which Letta hopes will ease budget pressure.

However S&P said the main problem was a lack of structural reform to put the economy on a sustainable path toward growth. "In our view, the low growth stems in large part from rigidities in Italy's labour and product markets", it said.

It pointed to data from the European Union statistics agency Eurostat which showed that nominal unit labour costs had increased more than in any other major member of the eurozone, underlining a sharp decline in productivity.

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