The move is the rating agency's first downgrade of the Eurozone's third-largest economy for almost two decades. As for the reasons behind yesterday's decision, Moody's noted "the fragile market sentiment that continues to surround euro area sovereigns with high levels of debt implies materially increased financing costs and funding costs for Italy."
The move was expected following S&P's cut of Italy's credit rating last month.
We reiterate that though we remain very cautious across the fixed income markets of Europe's southern periphery, especially Greece, Portugal and Ireland, we view the fundamental story for Italy as a little more constructive.
Compared to these peripheral countries, Italy's fiscal position is more favourable, with relatively low levels of private indebtedness, and if the government successfully follows through on its plans for fiscal reform including, in full, the €60bn austerity programme which has recently been agreed by parliament, then this could go some way to achieving a balanced budget by 2013.
However, the task ahead for the Italian Government ought not to be underestimated. Current plans require measures of institutional reform, revenue expansion and cost cutting to an extent never before executed within this economy - there are sure to be both successes and failures along the way and the prospect remains for a period of heightened volatility across all Italian risk assets.
We do take some comfort from the European Central Bank continuing its buying programme of Italian (and Spanish) bonds though believe this is only a temporary measure ahead of the imminent full ratification of the enlarged powers of the European Financial Stability Facility..
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