Fitch considers two-notch downgrade for Italy

Italy could be downgraded by a further two notches, said a senior Fitch Ratings director in Milan. Fitch had earlier said that it could cut Italy’s rating at the end of January.

“A downgrade by two notches is one of the possible options,” said Alessandro Settepani, senior director for business and relationship management at Fitch Ratings in Italy.

“The committee will assess the rating of Italy on the basis of refinancing levels and measures for growth,” he added, speaking at a Fitch credit outlook event in Milan.

Settepani said an agreement on the fiscal compact will be considered in any decision on an Italy downgrade.

Herman Van Rompuy, President of the European Council, stated in Rome earlier this week that the fiscal compact would be signed this month. Rompuy said: “I can assert today that we will agree on the new fiscal compact Treaty at the end of this month and we will sign it early March.”

The comments reflect the renewed concern in the markets, after talks with Greek bondholders broke down, and the ECB criticized the details of the fiscal compact currently being drawn up. 

Standard & Poor’s has Italy just three steps above junk status, at the same level as Ireland.

Peter O’Flanagan, an FX trader at ClearCurrency in London said: “The recovery from Fridays S&P downgrades and subsequent downgrade to the EFSF has been impressive. Many will argue that the cost of any downgrade has long since been factored in to market prices.

But, he said, “the fact remains that the Eurozone debt Crisis is still never far behind us. We still expect a wave of bank downgrades following Fridays sovereign downgrades and Greece are still in talks with creditors discussing the potential haircut that may be applied.”

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