S&P downgrades Italy

Standard and Poor's rating agency has downgraded Italy's sovereign debt by one notch, deepening the eurozone's economic woes. The agency now lists Italy as A/A-1, down from A+/A-1+.

The move was prompted by fears the country's huge debt is out of control, despite parliament recently passing an austerity budget.

The Italian government has strongly criticized S&P for this move, calling it “contaminated” by political considerations. In their statement issued on Tuesday, Silvio Berlusconi's government insisted their measures to balance the budget would bring results soon.

“Standard & Poor's evaluation appears to be dictated more by background articles in the newspapers than the reality of things and seems to be invalidated by political considerations," an Italian PM said as cited by the Guardian.

The latest move by the rating agency also gave a negative outlook on the country’s prospects. It now means it could be more expensive for Italy to borrow money to pay its creditors.

This is of deep concern to Brussels because Italy, Europe's fourth largest economy, is too big to rescue from the current bailout fund.

"We believe the reduced pace of Italy's economic activity to date will make the government's revised fiscal targets difficult to achieve," Standard and Poor’s said in a statement.

S&P noted that the Italian authorities “remain reluctant” to tackle such issues as modest foreign investment flows, low labor-participation rates and an inefficient public sector.

­Politically-motivated decision or not?

Substantial political changes are needed, as the political situation has always been the ground for Italy’s reliability, believes Franchesco Sishi, a columnist at Il Sole 24 Ore magazine.

“Italy needs a kind of new political settlement – a government of national unity to cope with this extraordinary situation. The recent Italian government is not up to the challenges,” Sishi states.

To reassure the markets, a privatization drive is needed, believes the columnist, as this would provide extra cash for the economic needs of the country.

“They should call on all other parties to form a coalition of national unity and than to start a program for privatization of assets,” he says.

­According to Godfrey Bloom, Member of the European Parliament for the UK Independence Party, says he is a little bit surprised it has taken so long for Italian credit rating to be downgraded.

“Unlike most politicians I used to be an investment manager,” he said. “And the risk assessment the market has decided today, or rather last night, is that Italian bonds are greater today.”

But Bloom also agrees that S&P’s decision was also politically-motivated, and not just an economic instrument. He believes that the “euro has been about politics from the very beginning.”

However, Harlan Green, the editor of Popular Economics.com, does not believe that unstable political situation in Italy has become the reason for the downgrade.

When has it never been unstable in Italy? It’s S&P trying to show off again, [to] make up for its past mistakes,” he claims.

Green suggests that the austerity measures, which were broadly proposed by Germany, will not solve anything

You don’t need austerity at a time like this,” he says.

Acceptable inflation rate from 4 to 5 per cent in a recovery from such a down cycle is necessary, according to Green.

You have to inflate the economy. You have to print more money. You cannot cut back,” he maintains.

If Germany does not stop insisting on austerity for everyone, it may get even worse, he concludes.

Whether it is a political decision or not, it will be a hard step for the eurozone to issue another bailout for Italy, says Peter Bild, financial journalist. The third-largest economy in Europe, Italy, will have to be funded by enormous sums in order to be saved from a catastrophe if the situation worsens, the journalist added.

“If Italy needs a bailout it will have to be a trillion-euro bailout, an enormous money package. The rest of the eurozone is certainly not in the position to do that. But if Italy shows a real danger of collapse, these doubts may be put aside,” believes Bild. But should such a scenario happen, a lot of political doubt will arise as well, he added.

Meanwhile two leading Italian Consumer Unions have filed a charge against S&P claiming the rating agency is speculating on the Italian problems and the downgrading of the country’s rating could cause only negative consequences, Reuters Italia reported Tuesday. Adusbef and Federconsumatori, major unions, are famous for their fight against the rating agencies’ “outrage”.