S&P adds to euro stress with Italy cut

Tue Sep 20, 2011 8:00am EDT
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By James Mackenzie and Catherine Hornby

ROME (Reuters) - Standard and Poor's rocked the euro and bond markets on Tuesday with a one-notch cut in Italy's credit rating that added fuel to opposition calls for Prime Minister Silvio Berlusconi to resign and increased pressure on the debt-stressed euro zone.

S&P's cut its ratings on the euro zone's third largest economy to A/A-1 from A+/A-1+, judging it less creditworthy than Slovakia, and kept its outlook on negative, warning of a deteriorating growth outlook and damaging political uncertainty.

The euro fell more than half a cent against the dollar before picking up following some reassuring signs from Greece, but bond yields hovered within sight of levels which prompted the European Central Bank to step into the market and buy Italian bonds.

"This is not just more negative news coming out of the euro zone," said Nicholas Spiro, managing director of London-based consultancy Spiro Sovereign Strategy. "This is a confirmation that the world's third-largest bond market, and the euro zone's third-largest economy, is in danger of succumbing to a self-fulfilling loss of confidence."

S&P, which put Italy on review for downgrade in May, said that the outlook for growth was worsening and Prime Minister Silvio Berlusconi's fractious center-right government had not shown it could respond effectively.

Under mounting pressure to cut its 1.9 trillion euro debt pile -- 120 percent of gross domestic product -- the government pushed a 59.8 billion euro austerity plan through parliament last week, pledging to balance its budget by 2013.

But there has been little confidence that the much-revised package of tax hikes and spending cuts, agreed only after repeated chopping and changing, will do anything to address Italy's underlying problem of persistent stagnant growth.

"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's said in a statement.   Continued...