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Moody's Investors Service has today downgraded Italy's government bond ratings to A2 with a negative outlook from Aa2, while affirming its short-term ratings at Prime-1. The rating action concludes the review for downgrade initiated by Moody's on June 17, 2011.
The main drivers that prompted the rating downgrade are:
(1) The material increase in long-term funding risks for euro area sovereigns with high levels of public debt, such as Italy, as a result of the sustained and non-cyclical erosion of confidence in the wholesale finance environment for euro sovereigns, due to the current sovereign debt crisis.
(2) The increased downside risks to economic growth due to macroeconomic structural weaknesses and a weakening global outlook.
(3) The implementation risks and time needed to achieve the government's fiscal consolidation targets to reverse the adverse trend observed in the public debt, due to economic and political uncertainties.
"We believe it is only a matter of time before we see more QE," said James Knightley at ING Financial Markets. "We favour November as the announcement point ... given close proximity to the US Federal Reserve and European Central Bank policy meetings and the Cannes G20 summit. Being seen to act in some kind of co-ordinated fashion may also give the stimulus more bang for its buck, rather than going it alone currently in what are very volatile markets and a mixed environment for data."