MILAN (Reuters) - Ratings agency Moody's said on Friday it had kept Italy's sovereign debt rating at Baa2 thanks to the country's reasonably low current cost of funding and its primary surplus.
But Moody's maintained its negative outlook for Italian sovereign debt because of prolonged economic crisis.
Markets had feared a round of credit downgrades after ratings agency Fitch cut Italy's credit rating at the beginning of March amid political deadlock in Rome.
"The first factor underpinning the negative outlook is Moody's view that Italy's medium-term growth rate will continue to be anemic as a result of the growing risk that the current recession will extend beyond the first half of 2013," Moody's said in a statement.
The agency slashed its economic forecasts for Italy. It now expects the economy to contract by 1.8 percent from a previous forecast of 1.0 percent and predicts economic expansion will be a mere 0.2 percent in 2014.
Moody's said current low funding costs for Italy are buying the country some time in which it needed to implement structural reforms. However, it said prospects of these reforms being actually carried out were poor in the current political context.
Inconclusive elections at the end of February have produced a parliament split among three main litigious political forces. Prime minister-designate Enrico Letta is trying to form a government backed by a broad parliamentary coalition.
Letta could announce a new government as early as Saturday, political sources told Reuters.
Reporting by Lisa Jucca; editing by Andrew Roche