Cause and Effect in European Politics and Law

Italy Downgraded, Greece Considers a Referendum on the Euro

Ralitsa Kovacheva, September 20, 2011

Italy met the dawn with its credit rating lowered. Surprisingly, this time it was not Moody's but Standard & Poor's that had first reduced the Italian long-term credit rating from "A+" to "A", and the short-term - from "A-1 +" to "A-1". Moreover, with a negative outlook, which means further reduction is possible. Moody's warned yet in June that it is possible to lower Italy's credit rating from the current Aa2 but the agency has still not completed its review of Italian finances.

The reasons for S&P's decision are clear - concerns whether Rome will be able to put its finances in order amid expectations for weaker economic growth. But mostly, the rating agency believes that "the Italian government's tentative policy response to recent market pressures suggests continuing future political uncertainty about the means of addressing Italy's economic challenges."

Although last week the parliament passed the austerity package, proposed by the government, doubts whether the measures will be strictly implemented remain. Moreover, given the fact that the package has been watered down even before being voted in Parliament under pressure from political parties, local authorities, businesses and unions.

Prime Minister Silvio Berlusconi reacted angrily to the news, accusing Standard & Poor's that its decision was "driven more by newspaper articles, rather than reality and appear to be tainted by political considerations." The Financial Times reported, that due to the downgrade Italian borrowing cost has risen to its highest level - 10-year yields up to 5.80 percent - since the European Central Bank has started buying Spanish and Italian debt in August.

The news aggravated fears of the debt crisis spreading to the eurozone's core, given the tense situation in Greece. It is expected the Troika (the European Commission, the ECB and the IMF) to complete the review of the Greek finances so the creditors to decide the allocation of the next tranche of the 110 billion euro loan. Negotiations, which were even suspended for a while, are difficult and that increases further the uncertainty whether Athens will receive the payment of 8 billion euros. For its part, the Greek government is between hammer and anvil, pressed on the one hand by its creditors for additional spending cuts, and on the other by public discontent.

Prime Minister George Papandreu “is considering calling for a referendum on whether Greece should continue to tackle its debt crisis within the eurozone or by exiting the single currency,” the Greek conservative daily Kathimerini wrote. According to newspaper sources, the Prime Minister hopes to get a fresh mandate to continue with the austerity measures. In the coming days the parliament will discuss a bill which paves the way for such a referendum, the newspaper reported.