RATING’S AGENCY MOODY’S has cut its rating of Italian government bonds, slashing its rating by three notches – and warning of further cuts to come.

The cuts are the first time Moody’s have cut the Italian rating in two decades, and brings its rating into line with that of Standard & Poor’s.

Moody’s rating now stands at A2 – down from Aa2, which was its third-highest ranking. The new Italian rating is still five notches above the junk threshold.

The equivalent Standard & Poor’s rating, of a single A, is only two grades above the ‘non-investment’ junk threshold.

Both agencies have put the bonds on a negative outlook, indicating that further downgrades could be on the way.

The Financial Times reports that Moody’s said the risk of an Italian default was “remote”, but said the “economic and political uncertainness” facing the country would make it more difficult to manage its debt burden.

“The uncertain market environment and the risk of further deterioration in investor sentiment could constrain the country’s access to the public debt markets,” it said.

The downgrade had been expected – although its severity perhaps less so – since Moody’s had warned of a review of Italian bonds two weeks ago. Italian premier Silvio Berlusconi said it had been anticipated and was not a blow.

Analysts told Reuters that the downgrade was not as a result of a precarious budget position, but rather because investors have become more sensitive to long-term risk – and are wary of Italy’s debt burden, which is higher than that of most countries.

The timing of the downgrade could hardly be worse for the Eurozone, however, which is already facing continued fears over whether Greece will be forced into a default – and after ministers decided to hold off on the latest batch of Greek bailout loans.

Greece needs the €8bn tranche by the end of the month or it will run out of money – and be faced with the prospect of having to slash public spending even further, or default on its obligations.