Italy still faces debt risk despite austerity: S&P

ROME Fri Jul 1, 2011 8:39am EDT

Rome's ancient Colosseum is seen from a helicopter August 12, 2004. REUTERS/Alessandro Bianchi

Rome's ancient Colosseum is seen from a helicopter August 12, 2004.

Credit: Reuters/Alessandro Bianchi

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ROME (Reuters) - Risks remain to Italy's plans to reduce its massive public debt despite new austerity measures, mainly due to weak economic growth prospects, ratings agency Standard & Poor's said on Friday.

Italy's cabinet on Thursday approved an austerity package worth some 47 billion euros ($66.55 billion) that is aimed at shielding the country from the Greek debt crisis and eliminating the budget deficit in 2014.

Ratings agencies S&P and Moody's have warned they may cut Italy's credit rating because of its inability to pass reforms to bring down its debt mountain. S&P has an A-plus long-term rating on Italy and the country is rated Aa2 by Moody's.

Following the unveiling of the government's austerity package, S&P said it maintained its view that there is a roughly one in three chance that its ratings on Italy could be lowered within the next 24 months.

"In light of Italy's weak growth ... it is our opinion that far more substantial microeconomic and macroeconomic reforms will be required," S&P said in a statement.

Italy's economy grew just 0.1 percent in the first quarter of 2011 and the fourth quarter of 2010, contrasting with strong recoveries in other major euro zone economies, and some analysts say it could easily fall back into recession.

S&P said the latest austerity plans were generally credible, particularly measures to contain the public sector wage bill and pension spending.

However, it said the government may be overly optimistic about how effective its fight against tax evasion could be.

Italy, the euro zone's third-largest economy, has been spared the worst of the market volatility since Greece's debt crisis exploded, thanks to a prudent fiscal policy, low private debt and a relatively solid banking system.

However, it remains vulnerable due to its massive public debt of around 120 percent of gross domestic product (GDP) and its chronically weak economic growth -- the most sluggish in the euro zone over the last decade.

Moody's said last month it could cut Italy's Aa2 rating, saying structural weaknesses such as a rigid labor market pose a challenge to growth and expressed concerns about funding conditions of countries with high debt levels.

(Reporting by Catherine Hornby; Editing by Susan Fenton)

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