Standard & Poor’s on Tuesday downgraded Italy’s sovereign debt by one notch to A/A-1 and kept its outlook negative, surprising markets, which have been speculating on a downgrade from rival Moody’s but not S&P.
Stockmarkets shrugged off the move, but the downgrading hit the euro. Markets however remain on an edge about Greece’s rickety finances and French banking stress, and world stocks as measured by MSCI were down slightly. But the pan-European FTSEurofirst 300 gained a third of a percent.
S&P said the outlook for Italy’s growth was worsening and there was little sign that Prime Minister Silvio Berlusconi’s centre-right government could respond effectively.
Under mounting pressure to cut its ¤1.9 trillion debt pile, Italy’s government pushed a ¤59.8 billion euro austerity plan through parliament last week, pledging a balanced budget by 2013. The downgrade underlined the poor state of euro zone finances and the fragility of attempts to fix it.
Other than euro zone worries, investors were bracing for a two-day meeting of the US Federal Reserve, with an eye on what policymakers will do to ignite the faltering US economy.
With one eye on the euro zone and another on a stubbornly high 9.1% US unemployment rate, the Fed is expected to begin shifting to longer-term securities.