- Created on Tuesday, 20 September 2011 14:22
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Italy has had its sovereign debt rating cut by Standard & Poor's, the latest move in a deepening European debt crisis.
S&P cut its rating one level to A/A-1 from A+/A-1+, adding that the outlook for the country was "negative".
It cited fears over Italy's ability to cut state spending and bring its finances in order.
Italy recently passed an unpopular austerity budget.
"We believe the reduced pace of Italy's economic activity to date will make the government's revised fiscal targets difficult to achieve," S&P said in a statement.
Italy follows fellow eurozone countries, Spain, Ireland, Greece, Portugal and Cyprus in having its credit rating downgraded this year.
The surprise move by the ratings agency will fuel fears of contagion in the eurozone.
Italy has Europe's second-largest debt level and the cost of that debt has been soaring in recent weeks as lenders to Italy have become nervous about its ability to repay loans.
The downgrade is likely to raise Italy's borrowing costs further.
"Coming at a time when the world's financial markets are on edge, warily watching for a default by Greece with knock-on unknown effects on the financial system, the optics of this downgrade stink," said Carl Weinberg of High Frequency Economics.
"Perceptions are more important than realities," he added.
"Investors will be shaken, as if they are not shaken enough already, by what appears to be decaying conditions for another sovereign issuer."
The downgrade has shaken already nervous investors.
In Asian trading the euro has fallen sharply against both the yen and the dollar and the wider share markets have also moved into the red.
Marc Lansonneur, of Societe General Private Banking said that the surprise move by S&P is likely to increase volatility in the markets.
"The sentiment of contagion is definitely stronger than before," he said.
"If there is no trust in the system then anything is possible. The less trust you have the more expensive the money is to borrow for European countries and the worse the crisis is. It then starts fuelling itself."
Concern over Greece and whether or not it will default on its loans hit markets hard on Monday.
The Greek government is in ongoing talks with the International Monetary Fund and the European Union about getting more bailout money.
Earlier this month, S&P cut the credit rating of the US from AAA to AA+ for the first time in its history.