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Italy government bonds downgraded

Moody's Investors Service has downgraded Italy's government bond ratings to A2 with a negative outlook from Aa2 - the result of high debt, a weak global economy and political uncertainties that delay corrective action.

While the change moves the rating down three notches, it is still investment grade. Moody's affirmed the short-term ratings at Prime-1.

Moody's said the size of the rating action is largely driven by the sustained increase in the country's susceptibility to financial shocks, however, the A2 rating indicates the risk of default by Italy remains remote.

"Nonetheless, Moody's believes that the structural shift in sentiment in the euro area funding market implies increased vulnerability of this country to loss of market access at affordable rates that is incompatible with a 'Aa' rating," the analysts said.

The action follows the September 19 one-notch downgrade by Standard & Poor's Ratings Services, which cut Italy's long- and short-term sovereign credit ratings to A/A-1 from A+/A-1+. That rating is still five steps above junk status. S&P analysts cited weakening economic growth for the nation and higher-than-expected levels of government debt.

The European Central Bank had demanded stiff austerity measures but doubts persist about how serious Italy is about coming to grips with its debt.

The Italian economy continues to face significant challenges due to structural economic weaknesses including low productivity and important labour and product market rigidities, Moody's said. These problems have slowed growth rates over the past decade and continue to hinder the economy's recovery from the severe 2009 recession.

The government's reform plans have only just started to address some of these structural challenges.

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