Moody’s slashes Italy's rating by two notches

US ratings agency Moody’s has downgraded Italy’s government bond rating by two notches, citing the knock-on effects of a possible Greek exit from the Euro Zone and Spain’s banking woes.

In reducing the rating to Baa2 from A3, Moody’s had said yesterday that Italy was now “more likely to experience a further sharp increase in its funding costs or the loss of market access” for borrowing to service its budget.

The move lowered Italy’s rating to two notches above junk-bond status, and came just before the debt-laden country attempts today to raise $6.4 billion in a medium- and long-term government bond auction.

Italy had yesterday raised €7.5 billion in one-year bonds at a sharply lower rate than previously, indicating improved investor confidence.

But in a statement, Moody’s Investors Service spelt out the challenges both external and internal that face the Euro Zone’s third-biggest economy.

“The risk of a Greek exit from the euro has risen, the Spanish banking system will experience greater credit losses than anticipated, and Spain’s own funding challenges are greater than previously recognised,” it said.

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