Standard and Poor's yesterday downgraded Italian sovereign debt to A with a negative outlook. This means that further downgrades are still possible. This means that Italy's Standard and Poor's rating is now 3 notches below that assigned by Moody's, which announced last week its intention to review the Italian measures brought in to deal with the debt problems.
As is usual with these things, the base rate of borrowing rose, leaving yields on 10 year Italian bonds at 5.80% this morning, the highest since the European Central Bank started buying Italian and Spanish bonds in August, according to the FT. By contrast, 10 year German Bund yields this morning were at a low of 1.75%.
Standard and Poor's cited Italy’s “weakening economic growth prospects” and the difficulty of the “fragile governing coalition” being able to “respond decisively” to the crisis, however Berlusconi responded by calling the downgrade political. The Italian government passed an an austerity package just six days ago, however Standard and Poor's has clearly not been much reassured. It would appear that concerns surrounding Italy's ability to deal with the debt crisis are as much about political capability than fiscal stringency.
The Eurozone may be preoccupied with an imminent Greek default, and while this would be tricky and painful, Greece's economy could - just about - be propped up by the rest of the Eurozone, should it choose to do so. However the larger Italian economy is not in this position, and as such any prospect of Italian default should signal something akin to a "save yourselves" policy turnaround. And then there's Spain...
The European institutions have, predictably, reacted angrily to the news, and have threatened a third round of regulation of CRAs, setting up a wholly independent European rating agency. Commentators have largely been skeptical about this threat, but more here if and when the plan is taken forward.