Why Moody's slashed Italy's credit rating

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Why Moody's slashed Italy's credit rating

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Moody’s lowered its rating on Italy’s government bonds because it sees a “material increase” in funding risks for euro zone countries with high levels of debt. It also warned further downgrades are possible.

Moody’s rating on Italy is now lower than Estonia and on a par with Malta. That underlined growing investor concern about the euro zone’s third largest economy, which is now firmly at the centre of the debt crisis:

Economist David Jones with IG Index in London explained the significance: “It is very serious, because this is how all of these crises in the past have started. It has been the perception that the risk of lending to a nation has increased. So it is a worry, and it is the thing that we were all concerned about with Greece and Ireland, that it just continues to spread. So the downgrade of Italy suggests that this European debt crisis is far from under control.”

The numbers tell the story – weak growth this year of 0.6 percent with even weaker predicted next year at 0.3 percent.

Rome currently owes 20 percent more than its entire gross domestic product for this year.

It does have a relatively modest budget deficit of four percent of GDP.

Moody’s said the likelihood of a default by Italy was “remote” but it is worried about the overall shift in sentiment among those who lend money to euro area governments.

Because of that Italy’s borrowing costs have soared over the past three months close to unsustainable levels.