Milan stocks slump after Moody’s warning on debt, Greek bailout impasse

MILAN – The Milan stock exchange opened sharply lower Monday after ratings agency Moody’s warned it may reduce Italy’s credit rating due to poor growth prospects and high public debt.

The Milan benchmark FTSE MIB index dropped 2.4 per cent Monday morning to 19,619 points. The losses outpaced other European indices, which also opened lower after eurozone finance ministers failed to reach a final deal on getting Greece its next installment of bailout money.

Moody’s put Italy on warning over concerns about its ability to spur growth and reduce public debt, which at around 120 per cent of GDP is one of the highest in Europe. It also cited fragile market sentiment for European countries with high levels of public debt, which pushes up borrowing costs.

The warning followed a similar move by Standard and Poor’s, which cut its rating outlook for Italy’s debt from stable to negative.

Italian banks, which account for a large part of the Milan index, were some of the biggest losers when markets opened on Monday. Montepaschi was down 5 per cent, Intesa Sanpaolo 2.9 per cent and Unicredit 2.9 per cent. Oil stocks were also under pressure.

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The real test for Italy – which will be a factor in determining whether it too will be struck by public debt market jitters – will be interim budget moves that Finance Minister Giulio Tremonti is expected to lay out by the end of the month. The manoeuvr will be considered by Moody’s, which announced Friday it will evaluate whether to reduce Italy’s Aa2 rating, following a similar move by Standard and Poor’s.

The financial manoeuvr “is the crucial event,” said Marco Valli, chief eurozone economist at Unicredit.

“It has to be a credible manoeuvr, with credible cuts and credible measures against evasion. Also measures that are not put off until 2013 and 2014, but that cover the entire time frame,” Valli said.

The government’s key political ally, the Northern League, is pressuring Premier Silvio Berlusconi to lower taxes as one condition for its continued support. Berlusconi’s government has been weakened by a pair of stunning electoral defeats, that also eroded support for the Northern League.

Berlusconi needs the League’s support to complete his five-year term, ending in 2013.

Valli and other analysts said the warnings by Moody’s and Standard & Poor’s should give Tremonti leverage to say he cannot cut taxes now.

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