Standard & Poor's Ratings Services on Monday downgraded Italy's credit rating by one notch, saying it sees weakening economic growth prospects for the nation and higher-than-expected levels of government debt.
The ratings firm cut Italy's long- and short-term sovereign credit ratings to "A/A-1" from "A+/A-1+." The rating is still five steps above junk status.
The ratings agency has a negative outlook on Italy's ratings and listed Italy's political issues and heavy debt load as the main factors contributing to the downgrade. It anticipates that political differences will likely limit Italy's ability to respond decisively to its debt crisis.
"What we view as the Italian government's tentative policy response to recent market pressures suggests continuing future political uncertainty about the means of addressing Italy's economic challenges," S&P managing director David T. Beers wrote in a research note outlining the credit rating downgrade.
Last week, Italy's Parliament gave final approval to Premier Silvio Berlusconi's government's austerity measures, a combination of higher taxes, pension reform and spending cuts. The planned cuts and taxes sparked street protests in Rome similar to those in other European countries trying to come to grips with the economic crisis.
Berlusconi has said that the government's austerity measures will shave more than 54 billion euros ($70 billion) off Italy's deficit over three years.
The European Central Bank had demanded stiff austerity measures to calm markets roiled for weeks over doubts about how serious Italy is about coming to grips with its debt. Italy is the eurozone's No. 3 economy and has a deficit to gross domestic product ratio of 120 percent, one of Europe's highest.
The bank has spent billions over the last month buying up Italian government bonds in a bid to lower Italy's borrowing costs and keep it from becoming the next eurozone nation to need an international bailout. The S&P downgrade, however, could lead to higher borrowing costs for Italy because it implies that investors face greater risks when buying Italian debt.
S&P said that weaker economic growth will likely limit the effectiveness of the government's economic plan.
"We believe the reduced pace of Italy's economic activity to date will make the government's revised fiscal targets difficult to achieve," S&P said.
The firm projects that Italy's real gross domestic product will grow at an annual average of 0.7 percent between this year and 2014, down from an earlier projection of 1.3 percent growth.
Italian officials have reportedly held talks with China's sovereign wealth fund in an effort to persuade Beijing to buy Italy's government bonds or invest in its companies. The nation's financial crunch also has prompted Rome to consider selling stakes in major state-owned companies such as power utility Enel or oil and gas supplier Eni, according to news reports.