Euro Debt Crisis: Italy’s Debt Rating Downgraded by S&P’s

ForexNewsNow – Standard and Poor’s (S&P) lowered Italy’s credit rating by one notch due to low growth prospects, the agency announced on Monday, September 19^th. This decision is bound to complicate the deficit and debt cut strategy that has been advanced by Italian Prime Minister Silvio Berlusconi’s government  to deal with Italy’s fiscal problems.

Italy’s long-term debt rating was lowered from A + to A (the same rating as the US) while the short-term rating was downgraded from A-1+ to A-1, the rating agency said in a statement. The prospect of these ratings is “negative”, meaning that the rating agency also plans to lower them in the future.

S&P’s points out both economic weaknesses and a political deadlock because of a fragile ruling coalition government. Political debates in parliament are very likely to restrict the ability of the government to act in this challenging macroeconomic environment.

In its most negative scenario, Standard and Poor’s even sees a new “recession” in 2012 in Italy with a 0.6% decrease in GDP before a “modest recovery” in 2013 and 2014. As a result of these gloomy economic forecasts, the objectives of deficit and debt reduction set by the current government will be “hard to reach,” according to the rating agency.

This decision is likely to a weaken the euro as it casts more doubt on the ability of the euro zone to confront ongoing sovereign debt issues in member states.