S&P Revises Italy's Credit Outlook to Negative; Italy Heads for Recession; Expect ECB to Hold Rates

In a move that is guaranteed to have Italy, the EU, and the ECB howling, Italy Outlook Revised to Negative by S&P; Ratings Affirmed

Italy had its credit-rating outlook lowered to negative from stable by Standard & Poor�s, which cited the nation�s slowing economic growth and �diminished� prospects for a reduction of government debt.

S&P affirmed the country�s A+ long-term rating, the fifth highest, and its top-ranked A-1+ short-term rating, the company said in a statement today.

�Italy�s current growth prospects are weak, and the political commitment for productivity-enhancing reforms appears to be faltering,� S&P said. �Potential political gridlock could contribute to fiscal slippage. As a result, we believe Italy�s prospects for reducing its general government debt have diminished.�

The Italian economy expanded 0.1 percent in the first quarter, less than economists forecast, as gains in exports failed to offset weak domestic demand. The euro region�s third- biggest economy won�t return to its pre-recession level for at least another two years, and the $2.3 trillion economy needs to raise productivity, the Organization for Economic Cooperation and Development said this month in a report.

Fitch Ratings today cut Greece�s long-term debt rating to B+, four notches below investment grade, and placed it on rating watch negative. Even a voluntary extension of the country�s bond maturities would be considered �a default event,� the rating company said in a statement. Greek 10-year bond yields surged to a record 16.6 percent.

Italy Heads for Recession

Italy is the Euro-Zone's third largest economy and it is on the verge of recession with a mere 0.1 percent GDP advance in the first quarter.

ECB Hikes Likely on Hold

Will Trichet hike into that? I think not, and if not, that will pave the way for another leg lower on the Euro.

When Greece defaults and when Spain or Italy gets in serious trouble, the Euro will come under even more pressure. Notice I said "when" not if.

The Euro-Zone economy is on the edge of a cliff and it will not take much to send it over the edge.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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