5 Oct 2011

Moody's slashes Italian credit rating

7:15 pm on 5 October 2011

The international ratings agency Moody's has slashed the Italian government's credit rating from Aa2 to A2 with a negative outlook.

It blames a "material increase in long-term funding risks for the euro area", due to lost confidence in eurozone government debts.

Despite Rome's low current borrowing needs, and low private-sector debt levels in Italy, Moody's says market sentiment has turned against the euro.

Italian prime minister Silvio Berlusconi says the decision was expected, and the government is "working with the maximum commitment to achieve its budget objectives".

Analysts say the downgrade is likely to be followed by similar cuts in the credit rating of Italy's banks, which would put severe pressure on their ability to borrow.

"This downgrade will make it even harder for Italy to borrow," the BBC business editor says. "However, that is not the worst of it.

"If Italy is looking like a more risky place to lend, its banks... will find it harder and more expensive to borrow. The [eurozone] banking crisis will be exacerbated."

The rationale for Moody's downgrade will also be worrying for other eurozone governments, such as Spain, whose borrowing costs have also risen like Italy's as markets have lost confidence in their creditworthiness.