Italian downgrade adds to euro zone's problems

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Italian downgrade adds to euro zone's problems

Italian downgrade adds to euro zone's problems
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Standard and Poor’s has cut Italy’s credit rating despite Rome’s moves to get its massive debt under control. S&P had put Italy on review for downgrade back in May.

An austerity plan – which was repeatedly modified – and pledges by Rome to balance the budget by 2013 apparently did not convince the debt-watchers.

There was some good news for the Berlusconi government as S&P said a default by Italy on its debts was an “extremely remote possibility”.

Italy owes 1.9 trillion euros, which is 120 percent of the country’s gross domestic product.

Hours after the ratings downgrade, the International Monetary Fund cut its growth forecasts for Italy to just 0.6 percent for this year and 0.3 percent next year.

Reuters’ senior economics correspondent in Rome said there are implications for the rest of Europe: “It’s another warning signal for Europe because as long as this debt crisis was limited to the smaller countries like Greece and Portugal and Ireland it seemed manageable, but when it starts affecting countries like Italy it is really not manageable.”

Economist Sony Kapoor, of Brussels-based think tank

Re-Define said: “Without full confidence in the credit-worthiness of Italy, it’s impossible to have full confidence in the solvency of the European banking system.”

Confindustria, Italy’s main employers federation, complained Italian business is tired of being treated as an “international laughing stock” because of the government.

Emma Marcegaglia, the head of Confindustria, said: “The government must either adopt immediate, serious and also unpopular reforms or else, I am not afraid to say it, it must pack its bags and resign.”

Financial markets are waiting to see what rival agency Moody’s will do. It put Italy on review in June. Moody’s has said it will decide within a month whether to cut the country’s rating.

For more insight we spoke to Tito Boeri, professor of economics at Bocconi University in Milan.

euronews: “The cut in Italy’s credit rating is a further blow to the country’s credibility – and not just its economic credibility. Professor Tito Boeri, why – when Greece is about to go bankrupt – is Standard & Poor beating up on Italy?”

Tito Boeri:

“We have a government that has shown, that faced with this great crisis of credibility, it was barely able to take any of the necessary measures. What they did eventually do is actually slowing growth and doing nothing to support Italy’s economic growth. So the political assessment of our country is that we have a government that is unable to respond to the challenges of the crisis we face.”

euronews: “But Italy is not in as bad a state as Greece. Do you believe these new pressures on Italy’s debt will further weaken the euro and hit the entire euro zone?”

Tito Boeri:

“Of course, because while it just involved Greece, the crisis in a peripheral country could be managed with the systems the EU and the euro zone already had in place – in particular the rescue fund, or through interventions by the ECB. When a country like Italy is involved, European intervention is clearly much less efficient. Italy can’t wait for Europe to intervene, it must act alone and that is why the government should take timely action.”

euronews: “Moody’s currently has Italy’s credit rating on review for a possible downgrade. But Professor Boeri, Italy has just voted through a 60-billion-euro austerity plan, what does Rome have to do for the markets to ease up the pressure on Italy, how about if the Berlusconi government were to quit?”

Tito Boeri:

“The way to reassure the international markets is to immediately bring in a growth plan. As far as I can see, this government is not able to do that. Then, there is certainly the problem of our prime minister’s personal credibility. All of this leads us to the need for political change at this time.”

euronews: “President Obama has called on Germany’s Angela Merkel to seek a way out of the crisis. But they seem to view things differently on the two sides of the Atlantic. In the US they favour policies leading to rapid economic growth, whereas here in Europe everything is geared towards balancing government budgets.”

Tito Boeri:

“In Europe there are important differences between countries. Germany has experienced a real economic boom, and it is only now that growth is slowing, after it recovered from the recession. Spain has started the process of fiscal consolidation, which includes measures to stimulate growth. It is no accident that Spain is now being rewarded, with what Madrid has to pay as interest on its government bonds lower than Italy. Unfortunately a country like Italy, which is more important in the context of the balance of the euro area – because of its size and its public debt – is taking recessive measures.” (ie: cutting debt rather than boosting growth)

euronews: “In less than two months, Bank of Italy Governor Mario Draghi starts work as the new president of the European Central Bank. Jurgen Stark, the ECB’s chief economist, just resigned because he didn’t agree with the Bank buying Italian government bonds. Then there’s Greece. It’s not going to be easy for Draghi, is it?”

Tito Boeri:

“It is a difficult task. But he has the right skills for the job, not only his ability as a central banker but his experience as chairman of the Financial Stability Forum, and he has an understanding of what needs to be done. Don’t expect him to take a position supporting Italy. On the contrary, he has to act from the perspective of the common needs of the euro and the euro zone countries. It is important to have someone of his competence and of his level of independence as the head of the European Central Bank.”