World Bulletin / News Desk
Moody's surprised markets on Friday by downgrading Italy's government bond rating by two notches to Baa2 and warned it could cut it further, piling on pressure just hours before the euro zone third-largest economy launches its latest bond sale.
The ratings agency blamed increased liquidity risks for the country amid persistent euro zone woes and an expected deterioration of Italy's already weak economic condition as the main reasons behind its decision.
The downgrade of Italy to just two notches above junk status could raise already-painful borrowing costs for the country and risks undermining Prime Minister Mario Monti's efforts to turn market sentiment through tough fiscal and structural reforms.
The stark warning from Moody's, which comes as investors are already fretting about Spain's ability to mend its banking sector, knocked the euro down about a quarter of a cent and sunk BTP futures 60 ticks down.
"Italy's government debt rating could be downgraded further in the event there is additional material deterioration in the country's economic prospects or difficulties in implementing reform," the agency warned.
"Should Italy's access to public debt markets become more constrained and the country were to require external assistance, then Italy's sovereign rating could transition to substantially lower rating levels."
Moody's took its ratings for Italy below those from agencies Standard & Poor's Ratings Services and Fitch Ratings, a move that risks triggering further investment outflows from Italy.
In an interview published on Thursday, Peter Bofinger, an economic adviser to German Chancellor Angela Merkel, praised Monti's reform efforts and said Italy's borrowing costs of 6.0-6.5 percent were 'unreasonably high' in view of its structural balance and low deficit.
"It takes time to lower the debt. The key thing now is the deficit," Bofinger said.
The timing could not be worse for Italy as it seeks to sell 5.25 billion euros ($6.40 billion) in medium-term bonds later on Friday, including a new three-year issue.
There had been hopes borrowing costs would fall at the auction after signs of progress on a Spanish bank bailout and a sharp improvement in Italy's borrowing costs at a one-year bond auction on Thursday.
"Italian bonds were already giving up ground and the Moody's news is going to chew them a bit further," said a bond trader.
Moody's said the downgrade was driven by Italy's increased susceptibility to political event risk, such as a Greek exit from the euro zone or Spain requiring further aid.
The agency said the country faced growing funding problems given its 2 trillion euro public debt and significant annual borrowing needs of 415 billion euros in 2012-2013, as well as its diminished overseas investor base.
On the other hand, a successful implementation of economic reform and fiscal measures that effectively strengthen the growth prospects of the Italian economy and the government's balance sheet would be credit positive and could lead to a stable outlook, Moody's said
Analysts estimate that foreigners hold about one third of Italy's public debt, down from around 40 percent a year ago. Data from Italy's banking association ABI on Thursday also showed that foreign deposits at Italian banks were down 20 percent year on year, confirming a trend of shrinking cross-border financing in the euro zone.
High sovereign borrowing costs are 'unsustainable' for Italian banks as they put massive strain on the cost of bank funding, Federico Ghizzoni, who heads Italy's largest bank by assets UniCredit said on Thursday.
Italian politicians and executives have criticised past rating action by the three top international agencies, saying the downgrades hit the country by forcing up borrowing costs.
Italian magistrates are currently investigating the downgrade action by the three rating agencies, which deny vigorously any wrongdoing.
Exit would cost average monthly salary for each household, Organization for Economic Cooperation and Development says
Firms to see deterioration in credit metrics as low oil prices impact cash flows
OPEC exporters as well as other non-OPEC producers, including Russia, fail to agree on oil output freeze
Moody's has upgraded Argentina's credit rating after a US appeals court ruling this week cleared the way for Buenos Aires to proceed with the biggest debt issue by an emerging market country in 20 years.
Ahead of Doha meeting, OPEC says 'hurdles prevail as oversupply persists and inventories remain high'
Kuwaiti OPEC head says Russia and OPEC are likely to agree on oil output freeze
'The good news is that the recovery continues; we have growth; we are not in crisis,' Christine Lagarde says
The meeting is a 'follow-up' to last month's talks between Qatar, Russia, Saudi Arabia and Venezuela when they proposed an accord to freeze oil output at January levels
'They are not trimming output, only keeping it at the same levels...this is the same unchanged policy,' one expert says
Iran joining Venezuela, Saudi Arabia, Qatar and Russia in freezing oil output levels
According to the ratings agency Moody’s, Iran is fiscally and structurally well placed to come back into the global economic scene
PM Davutoglu meets the heads of the world's largest companies as he promotes Turkish economic interests at World Economic Forum
Fund cuts global growth forecasts for both 2016 and 2017 by 0.2 percentage points
'Runaway inequality has created a world where 62 people own as much wealth as the poorest half of the world’s population'