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Agency cuts Italy's credit rating


Italy has had its credit rating cut by a New York agency

Italy has had its credit rating cut by a New York agency

Italy has had its credit rating cut by a New York agency

Standard and Poor's has lowered Italy's credit rating one notch, saying it expects much slower economic growth than official forecasts.

The New York-based agency cut its rating on Italy's debt to BBB-. That's its lowest investment-grade rating and one notch above "junk" status.

S&P said it expects the Italian economy will emerge from recession early next year.

But the agency predicts Italy's economy will grow only 0.2% in 2015, down from S&P's previous forecast of 1.1 percent for the year.

Looking further out, the agency predicts Italy's economy will grow between 0.5 and 1.2% from 2014 to 2017.

That's slower than government forecasts ranging from 0.7 to 1.9% growth in the same period.

Italy's weak economy and the country's eroding competitiveness are undermining its ability to sustain its public debt, S&P said in a note outlining its reasons for the downgrade.

"Our forecast also reflects our view of Italy's weak domestic fundamentals, including its difficult business environment and competitiveness challenges," the agency said.

Italy's economy has been struggling amid a broad economic slump in Europe, weighed by record-high unemployment and growing government debt.

The economy contracted 0.1% in the third quarter, bucking a mild European Union trend of growth seen even in economically battered Greece.

One key impediment to growth is Italy's unemployment rate, which is above 12%. That's helped constrain private-sector spending and contributed to subdued investment activity - trends S&P anticipates will continue.

Italy's prime minister, Matteo Renzi, is pushing legislation to make it easier to fire workers and reduce employers' incentive to hire temporary workers.

The plan, dubbed the Jobs Act, is meant to help encourage business to hire at a time when youth unemployment in Italy skyrocketed to 43.3% as of October.

The proposed legislation is opposed by labor unions, some of which have staged protest marches and called for a nationwide strike. Should it become law, S&P believes it could help stem job losses in the near-term and eventually help add jobs.

"Although we think the announced reform measures in a wide range of policy areas will ultimately help strengthen the economic fundamentals and resilience of the Italian economy, these benefits will likely not be felt in the near term," S&P said.

"In fact, the persistently weak economic conditions could raise fiscal risks before the growth-enhancing structural reforms take root."