ROME, Sept 20 – Italy lashed back on Tuesday at a sovereign rating downgrade which cited weak government and weak growth prospects in a new setback for the eurozone as it fights to stop debt contagion.
The Italian government, furious at the downgrade and wording, and Standard&Poor’s rating agency traded blows.
The Berlusconi government, beset by in-fighting and court cases, said the downgrade was “polluted by politics” but S&P struck back, insisting its analysis was objective.
The S&P statement is a negative comment on the government headed by Silvio Berlusconi, who is struggling to fight off new sex and blackmail scandals and whose popularity rating has dropped to an all-time low.
“The evaluation by Standard & Poor’s appears to have been dictated more by newspaper backchat than by the reality on the ground and it appears to have been polluted by political considerations,” the government said in a statement.
The ratings agency downgraded Italy’s rating to “A/A-1” from a “A+/A-1+” on Monday, warning about fiscal and political weaknesses for Berlusconi’s government and pointing to “Italy’s weakening economic growth prospects.”
It was the first downgrade for Italy since the start of the eurozone debt crisis which has spread from Greece, now locked in a latest round of rescue talks, and has forced Italy to introduce urgent budget measures to prevent contagion.
The opposition has called repeatedly for Berlusconi to step down to avert a broader economic crisis.
“The situation is really dramatic…. There is a lack of confidence,” said Gian Enrico Rusconi, a professor of political science at Turin university.
“Right now we have the eyes of the world on us,” he said.
Business daily Il Sole 24 Ore published a scathing editorial saying the government was “incapable of governing” and pointing to “the high price of decadence.”
The newspaper also reported that the government was preparing to revise down its economic growth estimates for 2011 and 2012 which could require further austerity.
The report said the government was now expecting growth of just 0.7 percent this year compared to its earlier forecast of 1.1 percent issued in April. The rate forecast for 2012 would be 0.8 percent against 1.3 percent.
The leftist daily La Repubblica said Italians were paying “an additional tax” for every day that Berlusconi stayed on as prime minister. It accused the prime minister of making Italy “less credible in the eyes of international investors.”
But the government said that the ruling coalition was very stable and pointed out that Italy had recently adopted a new package of austerity measures in response to heavy pressure from financial markets on Italy, the eurozone’s third-biggest economy.
“We should remind ourselves that Italy has adopted measures aimed at restoring budget balance by 2013 and that the government is preparing measures to support growth that will see results in the short and medium term,” it said.
Parliament adopted a 54.2-billion euro ($74.1-billion dollar) austerity package earlier this month aimed at reducing Italy’s giant debt mountain — one of the highest in the world at 120 percent of gross domestic product (GDP).
Standard & Poor’s said that political weakness would “limit the government’s ability to respond decisively” to the crisis.
It said in the downgrade statement: “We believe the reduced pace of Italy’s economic activity to date will make the government’s revised fiscal targets difficult to achieve.”
There have been growing signs of infighting in the government in recent weeks and Berlusconi’s legal problems have escalated. The 74-year-old billionaire who leads a colourful lifestyle and has dominated Italian politics since the early 1990s, is a defendant in three trials.
Berlusconi has also been caught up in a wide-ranging sleaze inquiry including damaging phone intercepts in which he is heard calling Italy a “shitty country” and saying that he was prime minister only “in my spare time”.
Prosecutors now want to speak to Berlusconi over alleged blackmail payments he made to a businessman who procured prostitutes for him in return for his silence.
The downgrade hit Italy’s bond markets, widening the difference between borrowing rates on Italian 10-year government bonds and German benchmark bonds — a key risk indicator.
The stock market in Milan also dropped at the open, falling by 1.21 percent, but it moved into positive territory later in the session rising 1.38 percent as the risk of a debt rating downgrade had already been priced in by investors.