Italy criticizes S&P downgrade as political

ROME (AP) — Italy criticized Standard & Poor’s on Tuesday for downgrading its credit rating, saying the decision was out of touch with reality at a time when the government was working to boost growth and reduce its debts.

Late Monday, S&P cut Italy’s credit rating by one notch to A from A+ in light of what it sees as the country’s weakening economic growth prospects and higher-than-expected levels of government debt.

Though the rating is still five steps above junk status, it is three below that given by rival Moody’s, which is currently assessing Italy.

Milan’s stock market brushed off the downgrade and S&P’s accompanying warning that further cuts may come as investors hoped for progress in Greek debt talks. However, the yield on the country’s ten-year bond spiked up 0.13 percentage point to 5.65 percent.

In a bid to calm markets, Premier Silvio Berlusconi’s office insisted in a statement Tuesday it had a solid majority in parliament, which recently passed measures to get a tighter grip on the public finances through a package of tax increases and budget cuts.

It said the government was working on growth measures and had pledged to balance the budget by 2013.

S&P’s evaluation, the government said in a statement, “seems dictated more by behind-the-scenes reports in newspapers than reality and seems contaminated by political considerations.”

It said the fruits of its growth and austerity plans “will be seen in the near-medium term.”

S&P also warned that it may downgrade Italy again, slapping a negative outlook on its ratings. It anticipates that political differences will likely limit Italy’s ability to respond decisively to its debt crisis.

“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,” S&P managing director David T. Beers said.

Last week, Italy’s Parliament gave final approval to the government’s austerity measures, a combination of higher taxes, pension reform and spending cuts that the government says will shave more than (euro) 54 billion ($70 billion) off Italy’s deficit over three years.

The planned cuts and taxes sparked street protests in Rome similar to those in other European countries trying to come to grips with the economic crisis.

The European Central Bank had demanded stiff austerity measures to calm markets roiled for weeks over doubts about how serious Italy is about dealing with its debts.

Italy is the eurozone’s third-largest economy and is widely-considered as too big to save. The big worry in the markets is that the country, whose debts stand at 120 percent of its GDP, will find it increasingly costly to borrow.

It’s that fear that prompted the European Central Bank to spend billions of euros over the past month buying up Italian government bonds in an attempt to bring down Italy’s borrowing costs.

The S&P downgrade, however, could lead to higher borrowing costs for Italy because it implies that investors face greater risks when buying Italian debt.

S&P said that weaker economic growth will likely limit the effectiveness of the government’s economic plan.

“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 said.

The firm projects that Italy’s economy will grow at an annual average of 0.7 percent between this year and 2014, down from an earlier projection of 1.3 percent growth.

Italian officials have reportedly held talks with China’s sovereign wealth fund in an effort to persuade Beijing to buy Italy’s government bonds or invest in its companies. The nation’s financial crunch also has prompted Rome to consider selling stakes in major state-owned companies such as power utility Enel or oil and gas supplier Eni, according to news reports.

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