By STACY MEICHTRY And SABRINA COHEN
SEPTEMBER 21, 2011

http://online.wsj.com/article/SB10001424053111904194604576582092710751516.html

ROME—The government of Prime Minister Silvio Berlusconi lashed out at ratings agency Standard & Poor’s Corp. for downgrading Italy’s sovereign rating, as the premier faced fresh calls to resign over his response to the euro-zone crisis.

Standard & Poor’s decision late Monday to downgrade Italy’s credit rating by one notch to single-A fed bond-traders’ jitters over European finances. The yield on the 10-year Italian government bonds Tuesday rose 0.15 percentage point to 5.67%, as investors demanded higher risk premiums.

The European Central Bank maintained its active buying of Italy’s bonds on Tuesday, according to traders. For weeks, the ECB has been propping up the market for Italian and Spanish government bonds, helping to prevent their borrowing costs from spiraling. The central bank has warned Rome, however, that its support is only temporary.

A statement issued from Mr. Berlusconi’s office on Tuesday dismissed the Standard & Poor’s decision, asserting that the New York-based firm had been led astray by media speculation.
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S&P Cuts Italy’s Rating

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“The evaluation of Standard & Poor’s seems dictated by newspaper hearsay rather than the reality of things and seems fouled by political considerations,” the statement said. The government’s majority in Parliament is solid, the government said, adding that the €54 billion ($74 billion) austerity package approved by Parliament last week will show results in the “medium-to-long term.”

S&P spokesman Martin Winn said the agency’s ratings are “apolitical.” “We do not suggest what policies a government should or should not pursue.” He declined to comment on whether the rating was based on media speculation.

Mr. Berlusconi’s comments underscored the persistent gulf between the government’s perception and the opinions of business leaders and opposition politicians. These critics consider the downgrade a sign of the premier’s inability to swiftly adopt measures strong enough to revive Italy’s moribund economy and reassure jittery investors.

“Tomorrow [or] next week, the government must enact serious, strong and unpopular reforms that show the markets a clear departure, or this government must go home,” Emma Marcegaglia, head of Italy’s powerful Confindustria business lobby, told reporters. “We’re tired of being an international laughing stock.”

Enrico Letta, a leader of the left-leaning Democratic Party, called on Mr. Berlusconi to make room for a “government of national responsibility,” or a caretaker government that can push through an economic overhaul and withstand pressure from Italy’s fractious political parties, unions and other special-interest groups.

Pierferdinando Casini, the head of the right-leaning Union Christian Democrats party, which backed Mr. Berlusconi in previous governments, called for an end to the governing coalition’s “obstinancy.”

The ECB has also pressed the Italian government to swiftly address the underlying problems of Italy’s economy, such as its rigid labor regulations.

International Monetary Fund chief economist Olivier Blanchard urged the ECB on Tuesday to stick with its Italian bond-buying program. “It’s absolutely essential that somebody be there to make sure that interest rates are low and Italy’s debt is sustainable,” he said.

On a conference call, S&P managing director Moritz Kraemer said the ratings firm “believes default is an extremely remote possibility” for Italy. But Mr. Kraemer said S&P will maintain its negative outlook on the country—meaning Italy has a one-in-three chance of another downgrade—citing special-interest groups and political infighting in Mr. Berlusconi’s governing coalition that has slowed its response to the fast-moving debt crisis.

Italy’s sovereign rating is “more likely to go down rather than up,” Mr. Kraemer added. The possible sale of readily available state assets such as public utilities and government stakes in energy companies won’t make a major dent in Italy’s €1.9 trillion public debt, Mr. Kraemer said, adding: “There are not enough assets around to solve their problems.”

Shares of Italy’s two largest banks, UniCredit SpA and Intesa Sanpaolo SpA, have lost around 50% since the beginning of 2011, because they hold large amounts of Italian bonds.

On Tuesday, however, Italy’s banking sector rose, with UniCredit up 0.5% to 71 European cents and Intesa Sanpaolo up 1.7% to 99 cents. The Milan stock exchange closed up 1.9%.

The impact of the downgrade on Italian stocks was muted, analysts and business leaders said, because investors had already priced the move into the market after rival ratings firm Moody’s Investors Service placed Italy on review for a downgrade earlier this summer. Moody’s said last Friday that it expected to conclude its review of Italy “within the next month.”

The “S&P downgrade was taken for granted,” said chairman Marco Tronchetti Provera, chairman of tire-maker Pirelli SpA.

—Ian Talley contributed to this article.


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