Italy shrugs off downgrade

Italy shrugged off a credit ratings downgrade by Moody's on Friday with a successful bond auction that raised 3.5 billion euros ($4.3 billion) for the government's coffers and reduced borrowing costs for three-year bonds to below the crucial 5-percent mark.

The credit ratings agency Moody's had downgraded Italian debt by two notches earlier on Friday, over fears that a possible Greek euro exit and a Spanish banking collapse could drive Italy further into crisis.

The US-based ratings agency downgraded Italy from A3 to Baa2, just two notches above junk status. The downgrade comes as Italy holds a bond auction on Friday, in the hopes of raising some 5.25 billion euros ($6.4 billion) by selling medium and long-term government debt.

Moody's cited growing risks within the broader 17-member eurozone currency union as a danger to Italy's fiscal and economic stability.

"The risk of a Greek exit from the euro has risen, the Spanish banking system will experience greater credit losses than anticipated, and Spain's own funding challenges are greater than previously recognized," the ratings agency said in a release.

Second downgrade

It was the second downgrade for Italy in five months. Moody's said the Italian economy would likely shrink by 2 percent in 2012, which would make it more difficult for Rome to meet its fiscal consolidation targets.

"Italy's near term economic outlook has deteriorated, as manifest in both weaker growth and higher unemployment, which creates risk of failure to meet fiscal consolidation targets," Moody's said.

"Failure to meet fiscal targets could in turn weaken market confidence further, raising the risk of a sudden stop in market funding," the ratings agency added.

But the European Commission's O'Connor praised Rome's efforts to reform the ailing Italian economy.

"We consider that Italy's reform effort in the past year has been impressive and it may not be an exaggeration to say it has been unprecedented," O'Connor said.

slk, ng/pfd (AP, AFP, dpa)