Standard & Poor’s (S&P) on Monday downgraded Italy’s sovereign debt rating, citing economic, fiscal and political weaknesses in a fresh blow to Italian Prime Minister Silvio Berlusconi’s fragile coalition government.
The ratings agency said it had downgraded Italian debt to “A/A-1” from a “A+/A-1+” grade because of “Italy’s weakening economic growth prospects.”
It added that Italy’s weak governing coalition would “limit the government’s ability to respond decisively” to events.
“We believe the reduced pace of Italy’s economic activity to date will make the government’s revised fiscal targets difficult to achieve,” S&P said in a statement.
It was more bad news for Berlusconi, who is under fire over the economy, in the courts and, increasingly, from the voters; his popularity plunged to 24 percent in a poll this month.
He appeared in a Milan court on Monday for a hearing into claims he paid a lawyer 416,000 euros (US$600,000) for false testimony about his business dealings.
He is also on trial for allegedly buying sex from a girl known as “Ruby the Heart Stealer” when she was a minor.
Standard & Poor’s in its analysis offered no succor to the beleaguered prime minister.
Low labor participation rates, an inefficient public sector and modest foreign investment flows were cited as key drags on growth.
“In our view, the authorities remain reluctant to tackle these issues,” the agency said.
Warning that another downgrade was likely, the ratings agency said a new recession in Italy was on the cards next year with the real economy declining by 0.6 percent, followed by a “modest recovery” in 2013 to 2014.
S&P’s rival ratings agency Moody’s has already indicated it is weighing its rating for Italy, which is currently at “Aa2,” two notches below Moody’s top triple-A rating.
Italy has tried to reassure investors by announcing a new austerity package which should see the country balance its budget by 2013.
Italy’s public debt rose to 1.911 trillion euros in July, Bank of Italy data showed last week, a month after it crossed the 1.9 trillion euros mark for the first time.
Italy yesterday denounced the S&P’s downgrade, saying the move had been clouded by political considerations.
“The evaluation by Standard & Poor’s appears to have been dictated more by newspaper backchat than by the reality on the ground and it appears to have been clouded by political considerations,” the government said in a statement.
“The government has always had the confidence of parliament, demonstrating the solidity of its majority,” the statement said, referring to the ratings agency’s evaluation of the stability of the ruling coalition.
“We should remind ourselves that Italy has adopted measures aimed at restoring budget balance by 2013 and that the government is preparing measures to support growth that will see results in the short and medium term,” it said.
Public debt in the eurozone is legally set to remain below 60 percent of GDP. At about 120 percent, Italy’s debt level is double that, with the government projecting a fall to 119.4 percent of GDP next year.