On Friday, Moody’s surprised markets by downgrading the bond rating of Italy’s government by two notches to Baa2. It also warned that it might cut the rating even further. The move placed even more pressure on the country just ahead of its next bond sale.
The rating agency’s latest move left the rating for Italy at only two notches above the dreaded junk status and could increase the borrowing costs for the country. Moody’s stark warning, which highlighted the vulnerability of Italy to political shocks in the region, could help deepen worries over the eurozone’s debt crisis. The latest move by the ratings service moved its ratings for Italy below both the Fitch Ratings and Standard & Poor’s Rating Service. The timing is the worst that could happen to Italy as it looks to sell $6.4 billion in bonds later Friday afternoon, including a three-year issue that is new. The market had hoped the borrowing costs would drop at the latest auction after there were signs progress had been made on the bank bailout in Spain.
The agency said its downgrade was done by the increased susceptibility of Italy to what if called political event risk, like an exit of Greece from the euro zone or further aid being needed by Spain.
The rating agency said Italy faced increasing funding problems because of its high levels of debt and its annual borrowing requirements that are quite significant of over 415 billion euros between 2012 and 2013.
Moody’s also said there might be further economic deterioration in Italy, which Moody’s expects will contract during 2012 by 2%, putting additional pressure on the ability of the country to meets all fiscal targets.
