S&P downgrades Italy while Greek aid talks drag on

ITALY suffered a shock downgrade from Standard & Poor’s late last night, which the ratings agency blamed on the political squabbling that is preventing the government from reacting properly to its financial woes.

S&P said the downgrade by one notch to A/A-1 also comes with a negative outlook, warning that Prime Minister Silvio Berlusconi’s austerity package “will likely do little to boost Italy’s economic performance”.

In a separate blow to the Eurozone’s chances of a quick recovery, Greek leaders failed to come to a deal with the IMF and European authorities, putting off a decision on further austerity measures until tonight.

Greece insisted that it was close to deal to get the troika – the IMF, European Commission and European Central Bank (ECB) – to release its next €8bn (£6.9bn) instalment of aid, without which Athens will go bankrupt next month.

The troika had refused to return to Athens, having failed to get a firm plan from Greece at the weekend, and instead held a conference call.

The uncertainty sent stocks down and debt costs up: the shares of Barclays, Lloyds and Société Générale all plunged more than five per cent.

Greek yields continued their inexorable rise, with investors demanding a sixty per cent pay-out rate to lend to the Greece for just two years.

The brinkmanship over Greece’s sixth tranche of aid is the second time in three months that its lenders have threatened to stop paying because Athens is unable to meet its targets.

Meanwhile, the ECB revealed that it bought another €9.8bn of bonds last week in an attempt to keep a lid on government yields, bringing its total purchases to €152.5bn.