S&P cuts Italy’s rating by one notch

Standard and Poor’s cut its unsolicited ratings on Italy by one notch, warning of a deteriorating growth outlook and damaging political uncertainty, in a move that took markets by surprise and added to pressure on the debt-stressed euro zone.

S&P’s downgraded its unsolicited ratings on Italy to A/A-1 from A+/A-1+ and kept its outlook on negative, sending the euro more than half a cent lower against the dollar.

The agency, which put Italy on review for downgrade in May, said that the outlook for growth was worsening and there was little sign that Prime Minister Silvio Berlusconi’s fractious centre-right government could respond effectively.

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Under mounting pressure to cut its 1.9 trillion euro (£1.65bn) debt pile, the government pushed a 59.8 billion euro austerity plan through parliament last week, pledging a balanced budget by 2013.

But there has been little confidence that the much-revised package of tax hikes and spending cuts, agreed only after repeated chopping and changing, will do anything to address Italy’s underlying problem of persistent stagnant growth.

“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’s said in a statement.

“Furthermore, what we view as the Italian government’s tentative policy response to recent market pressures suggests continuing future political uncertainty about the means of addressing Italy’s economic challenges,” it said.

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Budgetary savings may not be possible because the government is relying heavily on revenue increases in a country that already has a high tax burden and is facing weakening economic growth prospects, S&P said. In addition, market interest rates are expected to rise, it said.

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