Moody's Investors Service on Friday said it may cut Italy's sovereign credit rating from AA2, citing challenges ahead for economic growth due to structural weaknesses and a likely rise in interest rates.
GIANLUIGI MANDRUZZATO, SENIOR ECONOMIST, BANCA BSI, MILAN:
I was surprised after Standard & Poor's and I'm surprised again now, especially as Moody's has been much more supportive of Italy in the past.
This puts extra pressure on the government to present a convincing deficit cutting package before the summer break and paradoxically I think the one who'll be happiest about it will be (Economy Minister Giulio) Tremonti because it will help him to resist the calls to open the purse strings.
Italy's public finances this year have actually been going rather well, and the deficit trend has even been positive since the S & P move, but the agencies are clearly not judging Italy on the current management of public accounts, they are looking at the lack of political will and ability to make it a more competitive, flexible, efficient economy that can grow and therefore bring down the debt in the medium term.
I think market reaction on Monday will still be driven by sentiment over Greece, but this decision by Moody's may mean Italy will fare worse than it would have done vis a vis the other peripherals.
KEITH SPRINGER, PRESIDENT, CAPITAL FINANCIAL ADVISORY SERVICES, SACRAMENTO, CALIFORNIA:
The only news seems to be bad news, but the stock market and investors are brushing it off. The EU is not going to let Italy go and is keeping Greece from defaulting. Italy would be pretty devastated if Greece defaults. If Greece is going to fall, what is the next country to go?
CARY LEAHEY, ECONOMIST AND MANAGING DIRECTOR, DECISION ECONOMICS, NEW YORK:
You are seeing a bit of the domino effect. A number of European countries, now including Italy, are considered suspect by the ratings agency. It's a game of dominos that you could extend to Belgium and, perhaps, to Spain. But Italy would be the largest country, at least at the moment, deemed suspect in the eyes of the rating agency.
DAN DORROW, HEAD OF RESEARCH, FAROS TRADING, STAMFORD, CONNECTICUT:
This reflects a Mediterranean or neighborhood effect that is going on right now. The state of California has greater problems and it is hard to see why Italy is the focus.
Certainly Italy is in a challenging situation, but nothing really changed to warrant this announcement as growth has not turned down significantly.
This is clearly precautionary. If there is a credit event in Greece clearly it could probably reach Spain, Italy, Portugal and Belgium.
Moody's was behind the curve with the subprime mortgage debacle and they are trying to relay to the market what could happen. Having said that. We are confident that this summer things will hold together and there will not be a credit type event.
PERRY PIAZZA, DIRECTOR OF INVESTMENT STRATEGIES, CONTANGO CAPITAL ADVISORS, SAN FRANCISCO:
The rating agencies are in a little catch-up mode here in order to protect themselves because everything is going down to the 11th hour. If there is a problem with the Greece situation, there is definitely a contagion issue because some of the European banks have exposure to Greek debt. There is a lot of cross-bank exposure. It could slow European growth.
What is priced into the market is a lot of bad news. The inclination right now is to sell first and ask questions later, but stocks and the euro have held up pretty well.
DAVID KELLY, CHIEF MARKET STRATEGIST, J.P. MORGAN FUNDS, NEW YORK:
The rating agencies throughout the European debt crisis have played not too helpful a role. Unfortunately, the news flows of European downgrades will only increase the volatility the markets.
Greece is in the most financial trouble in Europe. Clearing other countries including Italy clearly have budget issues. This shows that Europe can't wash its hand of the Greece situation. It must isolate the problem with Greece and help other countries to deal with their fiscal issues.
The big picture is that there continues to be an overhang of negative economic news and the European debt situation.
GREG SALVAGGIO, SENIOR VICE PRESIDENT, TEMPUS CONSULTING, WASHINGTON:
The Moody's news on Italy reinforces the ECB's concern about the prospect of contagion. And contagion should not happen. As a result, I think there's a going to be a package put together over the weekend, which is going to effectively offer Greece another a lifeline. No one, however, is going to deal with the issue and (they will) simply kick the can down the road.
MICHAEL WOOLFOLK, SENIOR CURRENCY STRATEGIST AT BNY MELLON IN NEW YORK:
This cannot be a positive for the euro with market players already concerned about the potential contagion effect that the Greek debt crisis could have.