By: DailyForex.com
The European sovereign debt crisis seems to be the gift that won’t stop giving. Cyprus became the most recent Eurozone member to need a bailout in order to be able to continue to meet her obligations, but doubts linger about Slovenia, Italy and, of course Spain despite the efforts of the respective governments.
Uncertainty about the legality of some austerity measures in Portugal and the very direction of those austerity policies has ignited a political crisis which could bring down the government although it seems to have calmed recently. The trouble was enough to cause the Euro to slip, markets to fall and government bond yields in Spain and Italy to rise.
The latest turning of the screws has been brought about by ratings agency Standard and Poor’s which has decided to downgrade its evaluation of Italy’s sovereign credit rating from BBB+ to BBB. The Italian bonds remain investment grade, but in the eyes of S&P have become a riskier bet, so yields are likely to rise. S&P justified the downgrade on the basis of the continuing weakness of the Italian economy which is the third largest in the Eurozone. The company is critical of lack of economic reforms in Italy noting that “in our view, the low growth stems in large part from rigidities in Italy's labour and product markets”. According to S&P, the Italian economy will contract by 1.9% in 2013 which marks a sharp deterioration over previous projections.
Italian unemployment currently stands at 12% of the workforce and bold political action is hampered by the fact that this year’s election proved indecisive.