Is Italy the next in line for a ratings downgrade?

All eyes are on Italy. Moody’s put the country’s sovereign rating on review for a conclusion as the ninety day review period drew to a close this week. The country is the latest in the set of unstable countries located within the euro zone to have its rating succumbed to a possible downgrade.

According to the rating agency, the country’s Aa2 debt rating was to be reviewed due to an “increasingly challenging economic and financial environment and fluid political developments in the euro area”.   Italy, the third largest country in the euro zone, is burdened with a debt level of 1.9 trillion euros (USD 2.59 trillion). Italian debt currently exceeds that of Spain, Greece, Ireland and Portugal combined. As a result, the debt is vulnerable to any further increases in yields upon refinancing of its maturing debt. Its debt levels are currently at an all time high and equivalent to 120 percent of the county’s GDP. Currently, Italian debt accounts for 23% of the euro zone’s sovereign debt, which has the ECB’s alarm bells ringing.

In an effort to stabilize current conditions, Prime Minister Silvio Berlusconi announced a 54 billion euro (USD 74.5 billion) austerity package along with budget cuts this month in order to convince the ECB to purchase Italian bonds after borrowing costs surged to a peak in August with the 10- year yield reaching a euro-era record 6.4 percent. Despite the ECB having spent more than 60 billion euros (USD 83 billion) towards buying euro-region debt, Italy’s 10-year yield is again approaching 6 percent.

China has reportedly shown interest in easing the Italian debt-ridden nation from this crisis. Although it is not certain how much Italian debt the Chinese government intends to buy, Wu Xiaoling, a former deputy governor of the People’s Bank of China, has mentioned that helping Italy would be positive for both China and the world. The Chinese government has previously purchased USD$ 500 million of Spanish debt and has pledged to purchase Greek debt.  With holdings of USD$ 3.2 trillion in reserves, China is currently being viewed as the worlds’ probable new ‘lender of last resort’. Furthermore, China is vulnerable to an unstable US economy as it holds over US$ 1.2 trillion in downgraded US treasuries.  An effort to diversify the Chinese foreign investments can be evidenced from the country’s stance towards these recent interests in the euro zone countries.

A downgrade for the Italian debt would give rise to a perplex situation for Italian financial industry as the country faces surging debt levels and a stagnant economy. In addition, the prime minister currently has to undergo four major trials, which could bring the leadership of the country at stake. With all these events intertwined, the mood appears to be bleak for the Italian economy and the coming days will further confirm the economic reality that is prevalent within the euro zone.

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