Italy passes acid test as its borrowing costs fall

Just hours after Moody’s cut Italy’s credit ratings to two notches, just above the junk status, Italian markets bounced back as its three-year borrowing costs fell well below 5% at a bond-yield auction.

The Italian bond market recovered some ground as Italy managed to sell €5.25 billion (£4.13 billion) in medium and long-term bonds, its top targeted amount, fetching the lowest yield since May on a new three-year issue. Italy’s debt rating was cut to Baa2 amid persistent banking crisis of Spain, growing concerns of Greek exit from the euro and doubts over Italy’s long-term resolve to implement the much-needed reforms.

Although, Moody’s appreciated Prime Minister Mario Monti’s commitment to fiscal reforms and structural consolidation, it warned that the country’s ratings could be downgraded again if the next Italian government failed to execute the required changes.

Moody’s said, “The negative outlook reflects our view that risks to implementing these reforms remain substantial. Adding to them is the deteriorating macroeconomic environment, which increases austerity and reform fatigue among the population.”

The credit rating agency also felt that as the 2013 elections draw closer, the risk of implementing these reforms rises. The stark warning from Moody’s, which comes as investors are already agitated about Spain’s ability to mend its banking sector, knocked the euro down about a quarter of a cent overnight and initially sunk Italian bond futures.

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