With characteristic aplomb, Italian Prime Minister Silvio Berlusconi blasted the ratings agency Standard &Poor's saying their decision to downgrade his country's debt was “politically motivated” and more influenced by newspaper reports than by his country's real economic situation.
S&P downgraded Italy's credit rating and said it continued to maintain a negative outlook on Italy's economic performance. The two other ratings agencies, Fitch's and Moody's did not change their rating.
The downgrade brought forth a spurt of complaints from Confindustria, the Italian industry federation. Confindustria President Emma Marcegaglia said: “We are fed up of being an international laughing stock when we go abroad with our products....The government must either adopt immediate, serious and also unpopular reforms or else, I am not afraid to say it, it must pack its bags and resign.”
S&P defended its decision to downgrade in a statement issued on Tuesday: “S&P's assessment is based on a detailed and independent analysis of Italy's economic and fiscal prospects.” The agency added that its sovereign ratings were “forward-looking assessments of credit risks provided to investors”.
Though markets opened slightly higher on Tuesday, there was persistent worry about the fate of the Euro and whether there would be a domino effect were Greece to default on its debt. Panic selling resulted in gold prices touching a three week low. European stocks too had a bad day on Monday although there was a slight recovery on Tuesday.
Investors are asking themselves just how serious the Berlusconi government really is about austerity and cost cutting measures. As the Guardian pointed out in a tongue in cheek article: “Austerity comes as naturally to Berlusconi as widows and orphans trading in derivatives… Just like Greece, Italy is a country that is in urgent need of structural reform — including a reduction in the public sector and improvements to tax collection (a basic function of a highly indebted state one would think). And yet the appetite for these reforms seems pretty minimal with the electorate and politicians preferring the “Dolce Vita”, and who wouldn't? However just like Fellini's famous 1960s film, the search for the good life may be fruitless.”
At the moment however, it is the spectre of a possible Greek default that has investors hopping. As Brian Milner of the Globe and Mail points out: European policy makers are rushing to protect the continent's banking system and other teetering economies from the fallout of any Greek bankruptcy, as the long battle to save Athens enters a critical stage.
As Greece's cash reserves quickly dwindle, the country is in dire need of more bailout money. The Greek government is almost certain to get the next instalment of its rescue money, but with great reluctance on the part of European officials.
