Italy's sovereign debt rating cut by S&P on growth fear

Italy has had its sovereign debt rating cut by Standard & Poor's, the latest move in the European debt crisis.

Markets shrugged off the decision, with shares rallying in morning trading.

S&P cut Italy's rating by one level to A from A+, and kept it on a negative outlook, saying that weak growth prospects may undermine the country's ability to cut state spending and bring its finances in order.

Italy said the move had been influenced by "political considerations".

Prime Minister Silvio Berlusconi said the downgrade had also been dictated more by stories in the media than by economic reality.Catching up'

Having started marginally lower, European stock markets then rose in morning trading.

Italy's MIB index rose 1.3% in the first hour, while, with the German Dax was up 1.5% and London's FTSE 100 0.7%.

"S&P were only catching up with the markets," said Jane Foley, currency strategist at Rabobank.

"The markets have been penalising the Italian bond market for some months now for its fragile coalition [and] messy budget talks."She added that fellow agency Moody's, who rates Italy three notches higher than S&P does, was now widely expected to follow suit with its own downgrade.
'Future uncertainty'

Italy recently passed an unpopular austerity budget, but S&P suggested this did not go far enough.

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

"Furthermore, what we view as the Italian government's tentative policy response to recent market pressures suggests continuing future political uncertainty about the means of addressing Italy's economic challenges."

Italy follows fellow eurozone countries Spain, the Republic of Ireland, Greece, Portugal and Cyprus in having its credit rating downgraded this year.

The surprise move by the ratings agency will fuel fears of contagion in the eurozone.

Italy has Europe's second-largest debt level and the cost of that debt has been rising in recent weeks as lenders to Italy have become nervous about its ability to repay loans.

But the costs of borrowing in Italy and Spain were virtually unchanged on Tuesday morning following S&P's announcement, with Italy's bond yield, which indicates its cost of borrowing, hovering around 5.6% in early trading.

The euro was also unchanged against the dollar at $1.368.
'No trust'

Marc Lansonneur, of Societe General Private Banking, said that the surprise move by S&P was likely to increase volatility in the markets.The sentiment of contagion is definitely stronger than before," he said.

"If there is no trust in the system, then anything is possible. The less trust you have the more expensive the money is to borrow for European countries and the worse the crisis is. It then starts fuelling itself."

Concern over Greece and whether or not it will default on its loans hit markets hard on Monday.

The Greek government is in talks with the International Monetary Fund and the European Union about getting more bailout money released.