Italy suffers a credit ratings blow by S&P and Fitch

Italy's credit rating was lowered yesterday by Standard & Poor's (S&P) and Fitch Ratings in a blow for Prime Minister Romano Prodi after he pledged to trim the government's debt and deficit to defend the nation's creditworthiness.

S&P cut Italy's rating to A plus, the second lowest of the 12 nations using the euro after Greece. Fitch trimmed the rating to AA minus from AA.

Italy became the only euro zone country to suffer two rating reductions since the start of the single currency in 1999.

"Ironically, to the extent that it raises Italy's borrowing costs, the downgrade makes it more difficult to reduce the debt and deficit," said Marc Chandler, the global head of currency strategy at Brown Brothers Harriman in New York.

Prodi had tried to stave off a rating cut with a draft budget that includes e34.7 billion (R328 billion) in spending reductions and revenue-raising measures. He said the plan would bring the deficit back within EU limits.

S&P said Prodi's budget did not do enough to cut spending and relied too much on growing tax revenue to lower the deficit.

Prodi must pass the budget by the end of the year.

He has just a single-vote majority in parliament and his own allies have already introduced 250 amendments to the plan that could complicate its passage. Prodi has reduced planned spending cuts by e5 billion to appease allies, saying it would be offset by higher-than-expected tax revenue. - Bloomberg