In a surprise move, Standard & Poor’s cut Italy’s credit rating by one notch on Tuesday. This in turn has increased the strains on the euro zone’s sovereign debt crisis and immediately puts more pressure on policymakers to take decisive action towards resolving the crisis.
The Standard & Poor’s rating is now three notches below Moody’s credit rating. The downgrade puts Italy below Slovakia and at the same level as Malta. Italy, the euro zone’s third-largest economy, has been dragged to the center of the sovereign debt crisis in the past three months as huge concerns have grown about the Italians’s ability to handle debt equal to 120 percent of GDP.
Reuters is reporting that three sources have confirmed that the Bank of China had stopped foreign exchange forwards and swaps trading with three top French banks and Switzerland’s UBS. The Bank of China’s decision to stop the trading with France’s SocGen, BNP Paribas and Credit Agricole reflect a broad uneasiness about financial risk in the euro zone crisis. French banks are the leaders among the most exposed to Greece’s debt, which many economists expect to default at some point in the future. Shares in SocGen and BNP were both down more than three percent in European trading.According to reports, the German engineering conglomerate Siemens withdrew an unknown amount in deposits from French bank Societe Generale in July.
Italy’s downgrade has now overshadowed signs of progress in Greece’s negotiations with international lenders to avoid running out of money in October. The downgrade has also overshadowed news that Brazil is willing to pump in $10 billion through the International Monetary Fund (IMF) to aid Europe.
Italian Prime Minister Silvio Berlusconi stated that S&P’s downgrade did not reflect reality, and the Italian government was already preparing measures to spur growth. “The assessments by Standard & Poor’s seem dictated more by newspaper stories than by reality and appear to be negatively influenced by political considerations,” Berlusconi said. Italian government bond yields rose on the news and the euro slid.
Analysts are saying the crisis will undoubtedly have to be addressed by policymakers starting with the U.S. Federal Reserve Board meeting on Tuesday and Wednesday and the G20 and IMF/World Bank meeting scheduled for Thursday and Friday in Washington D.C.