Italy passed a tough market test on Friday as its three-year borrowing costs fell well below 5 per cent at an auction hours after Moody’s cut the country’s rating to two notches above junk status.
The U.S. rating agency surprised markets on Friday by lowering Italy’s sovereign debt rating to Baa2 amid persistent worries about Spain’s ability to sort out its banking problems, concerns about a Greek exit from the euro and doubts over Italy’s long-term resolve to push through much-needed reforms.
Analysts say political uncertainty ahead of elections is the main risk for Italy, where frustration with austerity measures and the country’s weak and fragmented party system is stoking anti-European sentiment and has helped the meteoric rise of the populist Five Star Movement, led by comedian Beppe Grillo.
Respected technocrat Mr. Monti, who was called in last November to pull back Italy from the edge of the cliff and avoid a Greek-style debt crisis, has said he will stand down next year.
Three-times Prime Minister Silvio Berlusconi, who has kept a low profile since being forced out to leave room for Mr. Monti, announced this week he will return to front-line politics as the centre-right candidate, further muddling the political outlook.
Note EU-Digest: "reelecting Silvio Berlusconi would mean putting Dracula in charge of the blood bank said a member of Mr. Monti's coalition".
Read more: Italy passes market test despite Moody’s downgrade - The Globe and Mail
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