The ratings agency Standard & Poor's has downgraded Italy's credit rating by one notch to A with a negative outlook amid fears that Silvio Berlusconi's government cannot manage debt equal to 120% of Italy's GDP.
The FTSE 100 fell on Monday following S&P's announcement but has revived today.
Berlusconi issued a statement claiming “the assessments by Standard & Poor’s appear dictated more by newspaper articles than reality and appear to be tainted by political considerations”.
Many observers were surprised that it was S&P and not Moody's that downgraded Italy. Moody's said on Friday that it would extend a review of Italy's finances which could result in a downgrade of its Aa2 rating.
Though Italy's economic prospects are much better than those of Greece, there is more at stake because it is the third biggest economy in the Eurozone while Greece accounts for just 3% of European Union output. Many big banks in France and Germany have large exposure to Italy.
©2011 funds europe