Italy's Rating Cut by Standard & Poor's on Deficit (Update3)
July 7 (Bloomberg) -- Italy's credit rating was cut by Standard & Poor's because of Prime Minister Silvio Berlusconi's failure to control government spending and concern that planned tax cuts will boost the deficit of Europe's most-indebted nation.
S&P reduced its rating on Italy's long-term debt to AA- from AA, leaving the member of the Group of Seven industrial nations on a par with Andorra and Slovenia, the ratings company said in a statement. S&P had rated Italy AA since 1993.
The rating reduction is a further setback for Berlusconi, who took on the added job of finance minister Saturday after opposition to his government's economic policies forced the resignation of Giulio Tremonti. Italy is forecast by the International Monetary Fund to be the slowest-growing economy among the G-7 countries this year.
``This is a clear sign that they don't think the government is credible and neither are the tax cuts,'' said Pasquale Diana, an economist at J.P. Morgan Chase & Co. in London. ``I am very surprised by the timing because S&P did not even wait for the draft budget.''
Berlusconi on Monday promised 7.5 billion euros ($9.27 billion) of emergency spending cuts and revenue measures this year to avoid exceeded European Union deficit limits. At the same time he reiterated a plan to cut as much as 12 billion in income taxes that may push the deficit above the EU ceiling next year.
Allies
Allies in Berlusconi's four-party coalition have threatened to quit the government unless the premier shakes up his cabinet and gives them more say over economic policy, including promises of as much as 13 billion euros in tax cuts next year.
``The repercussions on the government are important and we must now act immediately to cut spending and decide on a draft budget that restores credibility,'' said Deputy Finance Minister Gianluigi Magri in a telephone interview.
The yield on the benchmark 4 1/4 percent Italian bond maturing in August 2014 dropped a basis point to 4.43 percent, 19 basis points more than equivalent German debt. Yields move inversely to bond prices.
As a result of the rating cut, Italy faces higher debt financing costs because it will have to offer higher returns to convince investors to buy its debt. Italy spends about 12 percent of its annual budget paying interest on its debt, which reached almost 1.1 times gross domestic product last year, the highest in the European Union. The 69.3 billion euros Italy spent on debt servicing last year, was the equivalent of 5.3 percent of gross domestic product, according the national statistics institute.
No Rebuke
The European Commission had warned Italy that without emergency measures the deficit would exceed the ceiling of 3 percent of GDP this year and next. EU finance ministers meeting in Brussels on Monday decided not to issue an official rebuke against Italy after Berlusconi presented the emergency deficit plan, saying that he appeared serious about controlling spending.
Italy's benchmark Mib30 stock index erased gains after the S&P announcement. The Mib30 fell 0.1 percent to 27,919 at 3:40 p.m. in Milan. The index has advanced 4.5 percent this year.
The rating reduction is the first for a G-7 nation by S&P since the ratings company lowered Japan's ranking to AA- from AA on April 15, 2002.