Is Italy going the way of Greece?

News that Standard & Poor’s has decided to cut the sovereign debt rating for Italy will fuel fears about the financial condition of the eurozone.

S&P cut Italy’s debt rating by one level from A+ to A. They applied a negative outlook for the country at the same time.

Citing similar reasons to the recent rating cut in the US, S&P explained their concerns over the ability of the Italian government to cut state spending and control its finances.

An unpopular austerity budget passed recently in Italy did not go far enough, in the view of S&P.

There are also worries about economic growth prospects in Italy.

The financial condition of Italy remains markedly stronger than that of Greece. What this latest eurozone downgrade does prompt is fears of greater contagion, as the difficulties in Greece risk spreading to its European neighbours.

It is clear that in the view of S&P, what these eurozone countries need is strong political leadership combined with a definite plan of action to deal with sovereign debts.

By downgrading sovereign debt ratings, S&P does not believe that the US or Italy demonstrate these important attributes.

Whilst this latest sovereign debt downgrade came as a surprise, the markets have taken the news surprisingly well. As I write this, the FTSE 100 index is trading up 34 points at 5,294 and the euro has strengthened slightly against the dollar at $1.36810 to €1.

This could mean that the markets have already priced in a weaker sovereign debt position for Italy or that they have confidence in an orderly resolution of the eurozone sovereign debt crisis.

Photo credit: Flickr/mhofstrand