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Moody's downgrades Italy by two notches

The credit rating agency has downgraded the third largest eurozone economy just hours ahead of its latest bond sale.

CREDIT RATINGS AGENCY Moody’s has cut Italy’s debt rating by two notches from Baa2 to A3 – just two levels above junk status.

The move has piled pressure on Italy by increasing the possibility of even more painful borrowing costs - just hours ahead of the country’s latest bond sale. The country is seeking to sell €5.25 billion in medium-term bonds later today.

Moody’s blamed increased liquidity risks for Italy and an expected deterioration of the country’s economy as the main reasons for the downgrade.

In a statement, the agency explained that Italy “is more likely to experience a further sharp increase in its funding costs or the loss of market access than at the time of our rating action five months ago due to increasingly fragile market confidence, contagion risk emanating from Greece and Spain and signs of an eroding non-domestic investor base.”

In the context of the eurozone, Moody’s noted that risk of a Greek exit from the euro has risen, that the Spanish banking system is expected to experience greater credit losses than anticipated, and that Spain’s own funding challenges are “greater than previously recognised”.

Its said Italy’s near-term economic outlook has deteriorated – demonstrated in both weaker growth and higher unemployment – which raised the risk that the country would not be able to meet fiscal consolidation targets. The agency said such a failure to meet fiscal targets could in turn weaken market confidence further and raise the risk of “a sudden stop in market funding”.

Moody’s rating for Italy is now below that of both Fitch and Standard & Poor’s.

Read: Moody’s downgrades 28 Spanish banks over debt concerns>

Read: Downgraded – Moody’s slashes Spain’s credit rating>

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