The market is making a resounding statement that will typify the response from International institutions in and beyond the Eurozone. On Monday, Italy’s Aa2 credit rating was cut to A2, due to purported market sentiment and “long-term funding risks in the eurozone area”. This can have a spiralling effect on the creditworthiness of Italy’s banks, which seem to resign itself to similar fates, which would put severe pressure on banks’ ability to borrow at low interest rates.
Robert Peston, Business editor of the BBC, says, “If Italy is looking like a more risky place to lend, its banks… will find it harder and more expensive to borrow. The [eurozone] banking crisis will be exacerbated.” As if there aren’t enough problems to deal with regarding debt restructuring and the small matter of managing a solution for Greece and its future pathway.
Additionally,Italy are now feeling the full force of the eurozone spiralling crisis, through a political angle also, as there have been numerous calls from Berlusconi’s long-time backers for the Prime Minister to step down following a decade of no economic growth and a dwindling of job prospects and a bleak future ahead.
Italy’s economy expanded an average 0.2 percent annually from 2001 to 2010, compared with 1.1 percent in the euro area. Gross domestic product grew 0.3 percent in the second quarter from the three months through March, when it grew 0.1 percent, national statistics institute Istat said on Sept. 9 (Bloomberg).
However, this may have ignited belated action by the controversial PM, with over 100 billion worth of deficit cuts and tax rises coming into the foray. Whether this will be counter-intutive (my rationale), due to the already stuttering economic growth, will be seen.
One of the most worrying consequences however is the over-flowing effect. For instance, another troubled eurozone country, Spain, have faced increased borrowing costs as markets have lost confidence of creditworthiness. This is the key for me; if you lose the markets, chaos foments. I’ll leave any extra analysis for the coming weeks, looking forward to see what solution our humble leaders come up with for repackaging Greece to the markets.