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Yesterday, Italy’s credit rating was cut by Moody’s Investors Service by three levels to A2 down from Aa2. This is the first downgrade for Italy by Moody’s in eighteen years and comes subsequent to the downgrade from Standard & Poor’s in September.

Despite the news however, European stock markets are rising today as it seems the focus is on the indications that European authorities will be taking serious action to resolve the heavy debts held by the banking system.

UK Chancellor George Osborne spoke out yesterday to say that it is vital that the banking system across Europe is reinforced and this is to be done by introducing more capital.

Similarly, Wolfgang Schaeuble the German finance minister announced that there is a possibility the 2008 bank support method will be reintroduced.

In addition, further signals that European officials are preparing to take action came on Tuesday when it was declared that there are plans to divide the Franco- Belgium bank Dexia into ‘good’ and ‘bad’ banks. The ‘good’ assets will then be sold by the end of this year and the toxic debts will be confined.

News of the plans resulted in Dexia share prices increasing by 9%, and the three big banks of France also experiencing share increases of up to 9%.

Likewise, the biggest Italian banks were up by 2%- 3%, regardless of Italy’s rating cut and expectations that Moody’s will proceed to downgrade the banks, Barclays increased by 4% and Royal Bank of Scotland increased by 3.3%.

Moody’ has held the increasing risks of long term lending in the eurozone as responsible for the downgrading of Italy’s rating. Italian Prime Minister Silvio Berlusconi was apparently unsurprised with the decision, despite the actions being taken by Italy to balance its budget. He stated that Italy is doing everything it can to meet targets and that the European Commission had previously approved plans for Italy to reach its goals by 2013.

For a long time, Italy has received more revenue from tax than it has spent, however due to a large overhanging debt of approximately 120% of GDP there is a heavy dependency on markets agreeing to repeatedly lend the debt including interest payments when they become due.

Moody’s has claimed that it is possible Italy will be downgraded again if decreasing confidence in investors continues to make itincreasingly difficult for Italy to raise money from investors.

About The Author

Lee Murphy

MAAT and ICPA accountant, with a passion for making accountancy and bookkeeping accessible. Other interests include cloud-based software development for web and mobile access, keeping fit, reading, and entrepreneurship.

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