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By Vittorio Hernandez
Standard & Poor's downgraded the credit rating of Italy to A from A+ and kept it on a negative outlook.
The ratings agency cited the weakening economic growth of the eurozone member and its rising borrowing cost which would make it difficult to cut Italy's debt load - the second largest in the European continent.
Following the S&P action, yield on Italy's benchmark 10-year bonds went up 3 basis points on Tuesday to 6.519 percent, higher by 385 basis points than the German debt.
Italy accused the rating agency of being influenced by political consideration in downgrading the country's debt rating. Italian Prime Minister Silvio Berlusconi said the downgrade was based more on media accounts of Italy's financial problems than reality.
A currency strategist said that with the S&P downgrade, another major rating agency, Moody's, is expected to follow Standard & Poor's and also cut the Italian rating. Moody's previously rated Italy three notches higher than the S&P rating.
Although the Italian government passed a $74-billion (EUR 54 billion) austerity budget, S&P said the slower pace of Italy's economic activity will prompt the government to further revise its fiscal targets which are deemed by the rating agency as difficult to reach.
S&P also chided the Italian government for its tentative policy response to recent market pressures which indicate ongoing future political uncertainty about ways of addressing the country's economic challenges.
Italy initially targeted to achieve a balanced budget by 2013, but with the downgrade it is expected to cut growth forecast for 2011 to 0.7 percent from 1.1 percent and to revise its borrowing forecast upward.
Italy is the sixth eurozone nation to suffer a credit rating downgrade after similar cuts on Spain, Ireland, Portugal, Cyprus and Greece this year.
The unabated debt crisis in the eurozone continues to erode confidence in the region's banks, worsening liquidity and causing the spread between secured and unsecured interest rates to its widest since December 2008.
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S&P Downgrades Italy's Debt Rating | Global Viewpoint