July 10 - Italy has been hit by another credit rating downgrade. Joanna Partridge looks at the reasons for Standard and Poor's cut and the prospects for an economy stuck in its worst recession since World War Two.
For Italians - it's that familiar sinking feeling. Their economy has been downgraded again. This time Standard and Poor's cut the sovereign rating to BBB, one notch above junk. The ratings agency said it was concerned about the economy's prospects, as it's still stuck in the worst recession since World War Two. The downgrade sent the euro lower. Shares in Italian banks also fell. It may be another blow for the Italian government, but Michael Hewson from CMC Markets says it won't make a difference to the economy. SOUNDBITE: Michael Hewson, CMC Markets, saying (English): "If this had happened two or three years ago, you'd have seen a much more marked effect, certainly in terms of risk appetite. Markets and investors generally don't pay that much attention to downgrades now, simply because of Mr Draghi's actions a year ago, the OMT programme, the loose monetary policy that the ECB has basically given guidance over the next 12-18 months, so I think further downgrades don't matter that much in the bigger scheme of things." The announcement came shortly before Italy was due to sell up to 16 billion euros of debt. It sold 7 billion euros of 1-year bills in the first auction on Wednesday, but paid the highest yield in 4 months. Reuters correspondent Steve Scherer says Italy has to start tackling its problems. SOUNDBITE: REUTERS CORRESPONDENT STEVE SCHERER SAYING (English): "The government needs to make structural reforms. S&P made it very clear and that is not going to be very easy. Prime Minister Letta has a government composed of rival factions and one of them is headed by Silvio Berlusconi who is facing a ruling in a trial coming up and the government is not looking very stable. So big decisions need to be made on behalf of the economy but no-one agrees exactly what needs to be done." Reforms are clearly needed. S&P and the IMF both predict the economy will shrink by around 1.9% this year. Prime Minister Letta said the downgrade showed Italy is still a long way from overcoming the current slump. But the recession is making it harder for Letta to hit EU budget targets while meeting his coalition partners' demands for tax cuts.