ROME Ratings agency Fitch downgraded Italy's sovereign debt on Friday, citing the country's sluggish economic growth, fiscal slippage, weak government, banking problems and political risk ahead of elections due in 2018.
Fitch cut Italy's sovereign credit rating to 'BBB' from 'BBB+', a move that could put further pressure on its borrowing costs which have already been rising in recent months. The outlook for the rating is now stable, it said.
The agency had put the euro zone's third largest economy on watch in October with a negative outlook ahead of a referendum on constitutional reforms intended to streamline lawmaking which was lost by former Prime Minister Matteo Renzi.
Renzi then resigned to make way for what Fitch described as "a weakened interim government," led by his former foreign minister Paolo Gentiloni.
"Italy's persistent track record of fiscal slippage, backloading of consolidation, weak economic growth and resulting failure to bring down the very high level of general government debt has left it more exposed to potential adverse shocks," Fitch said.
"This is compounded by an increase in political risk and ongoing weakness in the banking sector, which has required planned public intervention in three banks since December," it added.
Italy's public debt hit a record last year at almost 133 percent of gross domestic product (GDP) - the highest ratio in the 19-nation euro zone after Greece.
Italy, which has the most sluggish growth in the euro zone and an unstable political outlook, has repeatedly backslid on promised deficit cuts. The result is that markets have become increasingly leery of its government bonds.
The spread between Italian benchmark bond yields and their safer German equivalent has widened to more than two percentage points from one percentage point a year ago, and that rise would have been far steeper without the support of the European Central Bank.
Fitch noted that Italy's debt last year totaled 11.2 percent of GDP higher than the target Rome had set in 2013.
The ratings agency forecast Italy's economy will grow by 0.9 percent in 2017, the same pace as last year, and by 1.0 percent in 2018, which would still leave inflation-adjusted GDP more than 5 percent below the 2007 level.
In January, Canadian ratings agency DBRS cut Italy's sovereign rating, citing the same problems highlighted by Fitch. Moody's Investors Service also has the country on a negative outlook, meaning a downgrade could be in the pipeline.
Fitch said its outlook for Italy's banking sector was negative, reflecting the high level of non-performing loans and weak profitability.
Three banks - Monte dei Paschi di Siena, Banca Popolare di Vicenza and Veneto Banca - are seeking public intervention to keep them in business. The Italian banking sector as a whole is weighed down by some 203 billion euros ($217.68 billion) of bad loans.
The agency said that ahead of next year's election, the "risks of weak or unstable government have increased, as has the possibility of populist and eurosceptic parties influencing policy."
Recent opinion polls have given a clear and growing lead to the anti-establishment 5-Star Movement, which wants to hold a referendum on Italy's continued membership of the euro zone.
(Editing by G Crosse)