Moody’s cuts Italy's rating

Reuters / Philippe Wojazer
US rating agency unexpectedly downgraded Italy's sovereign credit rating by two notches to Baa2 from A3 and warned on further actions.

The agency said Friday that “Italy's near-term economic outlook has deteriorated, as manifest in both weaker growth and higher unemployment, which creates risk of failure to meet fiscal consolidation targets”. Moody’s also warned of  “a sudden stop in market funding” if Italy fails to meet fiscal targets.

The Italian economy is also sensitive to increased political risks, such as a Greek exit from the eurozone or further losses of Spanish banking, Moody’s said.

But the European Commission said on Friday it had doubts about the wisdom of Moody's decision and praised Rome's efforts to put its finances in order.

"I do think one can legitimately and seriously question the timing of it, whether the timing was appropriate," Commission spokesman Simon  O'Connor told a regular briefing.

"We consider that Italy's policy actions to ensure sound public finances address long-standing structural weaknesses and have been both determined and wide ranging," O'Connor said.

Though Italy’s rating was left just two notches above junk status, it is higher than that of Spain.

Moody’s downgraded Spain three notches to Baa3 on June 14. The agency said, Italy rating is supported by “maintenance of a primary surplus, large and diverse economy that can act as an important shock absorber in the current crisis, and substantial progress on the structural reforms.”

The move came just hours before the country launches its latest bond sale, adding pressure to its borrowing costs. Italy plans to earn 5.25 billion euro in bonds, including a new three-year issue.

On Thursday Italy raised targeted 7.5 billion euro in government bonds auction at a much lower rate than last month. Earlier the Italian Government approved a spending cut of 26 billion euros over the next three years in order to reduce debt.