Italy’s debt rating was cut by Standard & Poor’s and Fitch Ratings from A+ to AA-, after the government’s 2007 budget.
The downgrade comes after a new poll showed declining public confidence in Prime Minister Romano Prodi.
Though the budget received approval from the European Commission, Italy’s central bank, the main ratings agencies have all criticised the latest budget.
Critics say the new plan focuses too much on raising taxes to cut the deficit and does little for the country’s long-term problem of excessive spending.
“The downgrade reflects the new government’s inadequate response to Italy’s structural economic and fiscal challenges,” says Moritz Kramer S&P’s credit analyst.
Prodi blamed the economic problems on his predecessor, Silvio Berlusconi, saying the rating was “a largely expected alarm bell.”
Italy’s budget deficit is expected to hit 4.8 percent at the end of this year, which is above the EU’s limit of 3 percent of the country’s gross domestic product.
Though it has the highest debt levels in the EU, it ranks third in the world behind Japan and the U.S.