(Reuters) - Ratings agency Standard & Poor's cut Italy's sovereign credit rating by one notch, saying the country's economic growth prospects were getting weaker and planned reforms by the government would not help much.
S&P cut Italy's government debt rating to A/A-1 from A+/A-1+ and said the outlook for the rating was negative, meaning it could be cut further.
"This is definitely going to put a damper on any recovery in euro/dollar...Italy is a much bigger deal than Greece. The EU and the troika have a much larger problem at hand. Investors are going to punish the fact that Italy was downgraded. They still have an 'A' rating which is much better than a lot of the other countries. From the perspective of the surprise to the market, euro/dollar has been sold off aggressively. I think we're probably going to see more weakness going into the next 24 hours. It's a much bigger deal because a lot more countries are exposed to Italian debt than they are Greek debt. The greatest concern was never really about Greece but the contagion over to Italy and to Spain...The uncertainty has really escalated and CDS prices are really going to skyrocket. I think it's going to necessitate some sort of action by the G20 this weekend.
"For the Federal Reserve they are going to look at this downgrade of Italy and I think it's going to certainly increase the chance of some greater stimulus from the central bank. If they were thinking about increasing stimulus prior to the downgrade I think they are going to probably give it much more serious thought after the downgrade."
JACK ABLIN, CHIEF INVESTMENT OFFICER, HARRIS PRIVATE BANK, CHICAGO:
"I suppose it's not a surprise. The downgrade ramps up the urgency to resolve the EU imbalances. It's putting more pressure on policymakers."
"This is certainly not good news for financial markets and bank stocks in particular are likely to feel the pressure.
"I do have some problems though with S&P rating the debt of countries like Italy and the United States when it really has no better information about the country's finances than do private investors."
ALBERTO BERNAL, HEAD OF RESEARCH, BULLTICK CAPITAL MARKETS, MIAMI:
"At this point in time, with the level of uncertainty we have in markets, this kind of news is going to have negative impact. It's not that markets were not pricing in this risk, but I do think it will generate some additional selling on equity markets.
"Rating agencies are taking a very aggressive stance right now. Italy just passed a package of austerity measures."
ROBERT ALBERTSON, CHIEF STRATEGIST AT INVESTMENT BANK SANDLER O'NEILL+PARTNERS, NEW YORK
"The issue is not the rating. The issue is how you want to treat this debt over the long term. Most people start calculating haircuts that people should make on financial institutions that hold this debt.
"It (ratings) is worse than an art form. It is a lag indicator and it is misleading...The attention given to it is out of proportion with the issue. And the issue is: everyone has to fix balance sheets whether they are American homeowners or the Greek government. The degree of this and how you look at it, I don't think they come from ratings. I think they come from forward-looking assumptions about what these countries will all do and how they will fare.
"I think the sovereign debt issue in Europe has been significantly overblown. It has already caused enormous damage in the markets so that I don't think it bears resemblance to the issues they are dealing with. It is kind of a combination of media and others making the story something that it is not. This doesn't mean that there are not major issues that need to be resolved. If it focuses the European Central Bank and others on trying to get to a better solution quicker, that is all fine and good. But beyond that from an investment perspective, I don't rank it as particularly noteworthy."
CARL WEINBERG, CHIEF ECONOMIST, HIGH-FREQUENCY ECONOMICS, VALHALLA, NEW YORK
"This downgrade had to be expected, given the incompatibility of Italy's rating and its high level of debt to GDP. Italy is still quite credit-worthy, and the A rating is still very high even if the outlook is negative.
"Coming at a time when the world's financial markets are on edge, warily watching for a default by Greece with knock-on unknown effects on the financial system, the optics of this downgrade stink.
"Perceptions are more important than realities. Investors will be shaken as if they are not shaken enough already by what appears to be decaying conditions for another sovereign issuer.
"I expect this decision will push up yields for Italian bonds and pressure yields on other peripheral bond yields higher in the days ahead. This downgrade will push the euro lower."
JAMES PAULSEN, CHIEF INVESTMENT STRATEGIST, WELLS CAPITAL MANAGEMENT, MINNEAPOLIS, MINNESOTA
"Was it anticipated tonight? No. But again, is it really shocking given what yields have done?
"I think markets maybe are giving it a little bit of a discount because it is S&P and it is in isolation. I'm not saying it isn't legitimate, but because of S&P's history with the U.S. rating, maybe it will be discounted somewhat.
"It is not surprising, I guess, and again it is another thing that piles on and might have an impact on the futures, but come the morning, there are bigger issues unfolding. For instance, if Greece can get their house in order to get their funds for the short term, that is going to have a greater impact than S&P downgrading Italy."
"Or, if the EFSF expands its balance sheet like the Fed has done, that has a bigger impact than S&P cutting Italy.
"Given the volatility we have going on right now, normally a 7 point move down (in the S&P 500 futures) would be something to note, but in the context of current daily volatility, this is relatively small."
DENNIS GARTMAN, EDITOR OF 'THE GARTMAN LETTER' DAILY TRADING NOTE, IN SUFFOLK, VIRGINIA:
"This cannot be supportive of the euro. It has to be detrimental. The only question is 'hasn't this been discussed and rumored about before?' Certainly no one shall be terribly surprised by the decision.
"The point here is that all of the news out of Europe is horrid these days and this is but another in what shall be a long line of ratings cuts for the PIIGS, one at a time."