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Italy downgrade looming

Italy's long due revision has arrived at the worst moment, it seems that rating agencies have a special talent for bringing bad news at the worst possible time, quite interesting how the fundamentals of the Italian economy have been horrible for years and suddenly on the eve of the Greek bankruptcy Moody's has finally decided to be honest on this. It seems we are set for some torture next week.
For those who want to know more on the real status of the Italian economy, I would reccomend reading the following report from SocGen:
How Vulnerable is Italy

Below Full text from Moody's:

Frankfurt am Main, June 17, 2011 -- Moody's Investors Service has today placed Italy's Aa2 local and foreign currency government bond ratings on review for possible downgrade, while affirming its short-term ratings at Prime-1.

The main drivers that prompted the rating review are:
(1) Economic growth challenges due to macroeconomic structural weaknesses and a likely rise in interest rates over time;
(2) Implementation risks surrounding the fiscal consolidation plans that are required to reduce Italy's stock of debt and keep it at affordable levels; and
(3) Risks posed by changing funding conditions for European sovereigns with high levels of debt.
Moody's review will evaluate the weight of these growing risks in light of the country's high rating but also relative to some credit-strengthening trends that have been observed in recent years and are expected over the coming years, such as improved fiscal governance, lower budget deficits and a modest economic recovery.

RATIONALE FOR REVIEW
First, the Italian economy faces growth challenges in an environment characterized by long-term structural impediments to growth and potentially rising interest rates. Structural economic weaknesses -- mainly low productivity and important labour and product market rigidities -- have been a major impediment to growth in the last decade and continue to hinder the economy's recovery from the severe recession it experienced in 2009. Italy has so far only recovered a fraction of the nearly seven percentage points in GDP that it lost during the global crisis, despite low interest rates, which are likely to rise in the medium term. Growth prospects for the Italian economy in the coming years will be a crucial factor that will determine the government's revenues and the achievement of fiscal consolidation targets.
Second, there are implementation risks to the fiscal consolidation plans that are required to reduce Italy's stock of public debt to more affordable levels. Against a backdrop of rising interest rates and weak economic growth, the government may find it difficult to generate the primary surpluses that are needed to place the public debt-to-GDP ratio and the interest burden on a solid downward trend. The adoption of additional conservative fiscal policies may prove more difficult in the near future because the current government's electoral support is weakening, with the government facing challenges in gaining public approval for its policies. For example, the government's recent energy and water supply proposals were rejected by popular vote.
Third, the fragile market sentiment that continues to surround European sovereigns with high levels of debt poses additional risks for Italy. The continued stability of market demand for Italy's debt is uncertain at current yields. Although future policy actions within the euro area could reduce investors' concerns and stabilize funding costs, the opposite is also possible. In any event, going forward, investors appear likely to differentiate more among euro area sovereign borrowers than they did prior to the financial crisis, to the disadvantage of euro area countries with higher-than-average debt burdens, like Italy.

FOCUS OF RATINGS REVIEW
Moody's review of Italy's sovereign rating will focus on the growth prospects for the Italian economy in coming years, and particularly the prospects for a removal of important structural bottlenecks that could hinder a stronger economic recovery in the medium term. The review will also examine the government's ability to achieve ambitious fiscal consolidation targets and to implement further plans to generate substantial primary surpluses in the medium term. This will include an analysis of the vulnerability of the Italian government debt trajectory to a rise in risk premia, as well as the options for the government to react. The government's new fiscal plan, which is expected to be announced shortly, will be considered during the review.
In addition, any broader developments across the euro area, in particular with regard to the resolution of the euro area debt crisis and its impact on funding costs, could be important determinants of the outcome of Moody's rating review

PREVIOUS RATING ACTION AND METHODOLOGY

Moody's last rating action affecting Italy was implemented on 15 May 2002, when the rating agency upgraded Italy's Aa3 government bond ratings to Aa2 with a stable outlook. The rating action prior to that was taken on 3 July 1996, when the rating agency upgraded Italy's A1 government bond ratings to Aa3.

Moody's downgrade Greece to junk level

It seems Greece is willing to begin criminal proceedings against Moody's after the latest downgrade to junk status.


Moody's downgrades Greece to Caa1 from B1, negative outlook. Moody's Investors Service has downgraded Greece's local and foreign currency bond ratings to Caa1 from B1, and assigned a negative outlook to the ratings. The rating action concludes the review for possible downgrade that the rating agency initiated on 9 May 2011.

The main triggers for today's downgrade are as follows:

1. The increased risk that Greece will fail to stabilise its debt position, without a debt restructuring, in light of (1) the ever-increasing scale of the implementation challenges facing the government, (2) the country's highly uncertain growth prospects and (3) a track record of underperformance against budget consolidation targets.

2. The increased likelihood that Greece's supporters (the IMF, ECB and the EU Commission, together known as the "Troika") will, at some point in the future, require the participation of private creditors in a debt restructuring as a precondition for funding support.

Taken together, these risks imply at least an even chance of default over the rating horizon. Moody's points out that, over five-year investment horizons, around 50% of Caa1-rated sovereigns, non-financial corporate and financial institutions have consistently met their debt service requirements on a timely basis, while around 50% have defaulted.

Greece's Caa1 rating incorporates Moody's assumption that current negotiations between the Greek government and the Troika will result in further official support for the Greek government and the announcement of additional austerity and structural reform measures.

The expectation of a repeated failure to meet targets carries two implications. First, Greece is unlikely to return to the credit markets in 2012 for funding, and will require additional financial assistance from the Troika in order to avoid a default. The quid pro quo for such assistance will inevitably be further fiscal austerity and economic reform measures that will be necessary to address the shortcomings of the programme to date. Second, Moody's believes that raising the austerity bar still higher will further increase implementation risk for the Greek programme.

Eurozone crisis escalating again!

It appears that  recent intervention of China and Japan in supporting the escalating debt of the Euro zone via purchase of bonds has just managed to stop the hemorrhage for few weeks.
Bond vigilantes are back and they are punishing Europe again.
The European Central Bank (ECB) has stepped in to the financial markets to buy Portuguese bonds on Thursday amid growing fears that the eurozone's rolling crisis is about to claim its third victim.
Policymakers in Frankfurt intervened for the first time in three weeks as borrowing costs on Portugal's debt remained at a level that proved to be unsustainable for both Greece and Ireland.The ECB's attempt to reduce the tension was prompted by a rise in the yield on 10-year Portuguese bonds to 7.63% – the highest level since the country became a founder member of the single currency at the end of the 1990s.

The recent step in of China purchase of Euro Bonds has proven again how desperate the situation is in Europe and how ineffective is the political action on this escalating situation.

China is practically on a win-win situation, in one shot is diversifying its investments decoupling from the US Dollar toward the Euro but it is also gaining influence over Europe and at the same time buying pieces of the old continent. Greece has already relinquished control of its main port the Piraeus to China and Portugal, Ireland and Spain are following with concessions in exchange for being able to sustain few years more an unsustainable debt.

If the Chinese are farseeing in their decisions and actions, Europe is short-sighted and paralyzed by immediate cash-flow necessities and a lack of political vision. Europe is becoming more and more a spectator unable to make tough decisions and simply trying to move forward the day of reckoning.

In the meanwhile events are moving fast and this week a series of news are showing how the debt bomb countdown is speeding up:

• Germany which has always opposed fast-track economic integration of the eurozone because of the fear that it would create a two-tier EU is now looking for an agreement by next month on policies aimed at harmonising corporation tax rates, retirement ages, national bank rescue plans, and the abolition of index-linking for wages in the 17 eurozone countries even if countries as diverse as the Netherlands, Slovenia, Belgium and Austria were already balking at the proposals. Needless to say what a corporate tax harmonization would mean for Ireland, unemployment in the battered Celtic country would skyrocket as international companies would flee the country.

• Dominique Strauss-Kahn, managing director of the International Monetary Fund, has called for a new world currency that would challenge the dominance of the dollar and help curb future financial instability.Strauss-Kahn argued that the reserves that member countries held with the fund could be used, instead of the dollar, to price international trade. These so-called special drawing rights (SDRs) could also act as an alternative to the dollar in central banks' foreign currency reserves. "Using the SDR to price global trade and denominate financial assets would provide a buffer from exchange rate volatility," he said, while "issuing SDR-denominated bonds could create a potentially new class of reserve assets". Strauss-Kahn, who has been tipped as a contender for the French presidency next year, also argued that the way SDRs were valued, which is currently based on a basket of currencies – the dollar, sterling, the euro and the yen – be broadened to include others such as the Chinese yuan.

• Ratings agency Moody's has downgraded the unguaranteed senior unsecured debt of six Irish banks and said it may also cut deposit ratings. The agency said it was taking the decision following recent statements by the Government that Moody's said call into question its willingness to provide any additional support to the banks beyond that provided to date. Moody's cut the unguaranteed senior unsecured debt ratings of the Bank of Ireland (BoI) to Ba1/Not-Prime from Baa2/P-2. AIB meanwhile was cut to Ba2 from Baa3. EBS Building Society (EBS) and Irish Life & Permanent (IL&P) debt ratings fell to Ba2/Not-Prime from Baa3/P-3. Anglo Irish Bank and Irish Nationwide Building Society have been cut to Caa1 from Ba3. The ratings agency also said the long-term unguaranteed senior unsecured debt ratings of these banks have been placed on review for further possible downgrade.

USA at risk of credit downgrade

Moody's expressed concern about the new configuration of the US Congress, saying it could reduce the chances of an agreement to rein in the deficit

Moody's has warned that it may have to apply a negative outlook to America's top-notch AAA credit rating because of the US government's failure to tackle its growing budget deficit.

further details here