Italy’s debt rating cut to ‘A’ by Standard & Poor’s

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As world markets wait to see whether Greece can avoid defaulting on its debt, Standard & Poor’s delivered another reminder that Europe’s debt woes extend well beyond the cradle of Western civilization.

S&P late Monday downgraded Italy’s long-term debt rating to A from A+, the first reduction in the rating since October 2006. S&P also said its outlook was negative, meaning it could cut Italy further.

The euro currency, which slumped 0.8% to a seven-month low of $1.369 on Monday in New York, continued to slide in early Asian trading Tuesday, losing 0.5% to $1.362.

S&P -- which riled global markets in August when it cut its U.S. debt rating to AA+ from AAA -- said its downgrade of Italy reflected the country’s “weakening economic growth prospects” and fears that the “fragile” governing coalition won’t be able to take steps needed to address deepening problems.

Italy, the euro zone’s third-largest economy, faces a heavy debt burden that amounts to 120% of gross domestic product. Under pressure to bring the debt down, Parliament last week passed an austerity program of tax hikes and spending cuts.

But S&P said it doubted that the plan would work as well as the government of embattled Prime Minister Silvio Berlusconi projected, in large part because of a lack of economic growth.

“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 also took aim at Italy’s larger social issues: “Even under pressure, Italian political institutions, incumbent monopolies, public-sector workers and public- and private-sector unions impede the government’s ability to respond decisively to challenging economic conditions.”

And Berlusconi has his own problems, facing four separate court cases and new allegations of sexual escapades.

As worries about Italy’s debt load have mounted, the country’s stock market has become one of the world’s worst performers this year. The FTSE-MIB share index is down 30.2% this year, compared with a 19.2% drop for the average European blue-chip stock and 4.3% for the U.S. S&P 500 index.

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-- Tom Petruno