By Paolo von Schirach
Realted story:
July 10, 2013
WASHINGTON – Very recently I commented (see link above to related story) on the negative signal sent to financial markets by Italy and other Southern European countries trying to square the circle by softening austerity measures without crafting any credible economic growth strategies. The message is that, lacking new growth while spending will not be cut as significantly, overall debt levels will stay high and in fact go higher, with no chance of any reductions in the foreseable future.
Another S&P downgrade
And sure enough debt rating agencies are taking notice. Standard & Poor’s just downgraded Italy’s sovereign debt a bit more, (to a BBB level, a couple of notches above junk), maintaining a negative outlook. S&P cited high debt levels, increased labor costs and a persistent recession as rationale for a further downgrade.
Bad news
Let’s keep this in context. This new debt downgrade is not a catastrophic development. But, as a consequence, interest rates on the Italian 10 year bond just went up a bit more, getting once again closer to 5%. For the time being this additional debt service cost is manageable. But it is bad news. While the country needs a radical change of course, lack of policy guidance and negative sentiment are pushing Italy in the opposite direction.