When it comes to sovereign risk ratings, it could be a case of "out of Greece and into the fire" as venerable credit-rating agency Standard & Poor's this week joined Moody’s in issuing a sobering warning that Italy could be the next European nation in line for a downgrade.
With bondholders already nervous about Greece’s shaky debt, Italy’s cabinet on Thursday approved an austerity budget package cutting some 47 billion euros ($66.55 billion). The goal was to insulate the country from the crisis facing Italy’s neighbor just across the Adriatic Sea. But, so far, the measure doesn’t seem to be working.
Before the ink dry on the cutback proposal, analysts at S&P warned that there remains a 1-in-3 chance the agency could lower Italy’s current A+ long-term rating within the next two years.
"In light of Italy's weak growth ... it is our opinion that far more substantial microeconomic and macroeconomic reforms will be required," S&P said in a statement.
The Italian economy was dead in the water for the first quarter of 2011, growing by an anemic 0.1% -- the same as it did in the fourth quarter of 2010. And with the global economy now slowing, there is a good chance Italy’s economy could slip back into a recession.
On top of that bleak prospect, Europe’s third-largest economy is threatened by massive public debt of about 120% of the country's gross domestic product (GDP).
Addressing the just announced new austerity budget proposals -- which included controversial measures to reduce public sector wages and pension obligations -- S&P analysts said "in light of Italy’s weak growth, it is our opinion that far more substantial microeconomic and macroeconomic reforms will be required" to protect the country’s current credit status.
Moody’s issued its own warning on Italy’s credit rating on June 17, cautioning that the government’s inability to pass reforms to reduce its “mountain” of debt had led the agency to put its current Aa2 rating “on review for possible downgrade.”
According to 2011 International Monetary Fund projections, Italy will have a budget deficit-to-GDP ratio of 4.1 percent and public debt ratio of 120.6 percent.