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.
Under current conditions, the IEA expects global output to exceed demand until the second half of 2017, Fatih Birol told journalists on the sidelines of an energy conference in Singapore.
The decision comes as the steel arm of the sprawling $100 billion conglomerate struggles to offload its loss-making British assets while its carmaking business continues to be plagued by weak sales.
Water quality and shortages also remain threat to health of many with onset of diseases
Bank expects ‘solid rise in energy prices, led by oil' next year
Bank of Uganda Governor Emmanuel Tumusiime-Mutebile said in a statement the bank would remain open, continue to operate normally and that the central bank would protect deposits.
Four presidents meet, but hopes of diplomatic breakthrough for cease-fire in eastern Ukraine remain low
Having taken years to negotiate, some producers voiced impatience for the deal to now be finally sealed; others simply fail to see why anyone would reject it.
"The value of this project will be $10 billion with a final production level of 600,000 barrels of oil per day," he said in Tehran.
Bangladesh has been one of the worst victims of global warming, with thousands of people being killed by cyclones in recent years that have become more frequent and deadlier.
Exporting Israeli gas via Turkey to Europe is viable option, says Israeli Energy Minister
French energy group EDF views Turkey as 'growth country' with more room for nuclear, renewable and hydro projects, VP says
"If OPEC sticks to its new target, the market's rebalancing could come faster," it said.
Further warrants issued against police suspected of using ByLock messaging service
A stock index of firms compliant with the principles of Islamic Sharia law, in cooperation with Bosna Bank International was launched today
Azerbaijani President Ilham Aliyev says bilateral energy projects with Turkey play key role for energy security in region
Oliver Hart, Bengt Holmstrom receive award for work on role of legal agreements