Moody's cuts Italy credit rating by three notches (Reuters)

NEW YORK/ROME (Reuters) – Moody's Investors Service cut Italy's bond ratings by three notches on Tuesday, saying it saw a "material increase" in funding risks for euro zone countries with high levels of debt.

Moody's downgraded Italy's ratings to A2 from Aa2, a lower rating than that of Estonia, and kept a negative outlook on the rating, a sign that further downgrades are possible within the next few years.

The move comes after Standard and Poor's cut its rating on Italy to A/A-1 from A+/A-1+ on September 19 and underlines growing investor uncertainty about the euro zone's third largest economy, which is now firmly at the center of the debt crisis.

"The negative outlook reflects ongoing economic and financial risks in Italy and in the euro area," Moody's said in a statement.

"The uncertain market environment and the risk of further deterioration in investor sentiment could constrain the country's access to the public debt markets," it said.

Moody's also said that Italy's rating could "transition to substantially lower rating levels" if there were long-term uncertainty over the availability of external sources of liquidity support.

Italy's mix of chronically low growth, a huge public debt amounting to 120 percent of gross domestic product and a struggling government coalition has caused mounting alarm in financial markets.

The Moody's decision came as little surprise after the agency said on September 17 that it would finish a review for possible downgrade of its rating on Italy within a month.

"It's not that it was unexpected, but it doesn't help the situation at all," said Robbert Van Batenburg, Head of Equity Research, at Louis Capital in New York.

"They have already traded as if there was somewhat of a downgrade in the works, so it will probably force Italian policymakers to embark on more austerity programs. It will put another fiscal straitjacket on them," he said.

Moody's said the likelihood of a default by Italy was "remote," but the overall shift in sentiment on the euro area funding market implied a greater vulnerability to a loss of market access at affordable interest rates.

Italy's borrowing costs have soared over the past three months and have only been kept under control by the European Central Bank's purchase of its government bonds on secondary markets.

An auction of long-term bonds last month saw yields on 10 year BTPs rise to 5.86 percent, their highest level since the introduction of the euro more than a decade ago.

The center-right government of Prime Minister Silvio Berlusconi has been under heavy pressure over its handling of the escalating crisis and recently cut its growth forecasts through 2013.

It is now expecting the economy to expand by just 0.6 percent next year, down from a previous projection of 1.3 percent.

The government last month pushed through a 60 billion euro austerity package -- bringing forward by one year to 2013 a goal to balance its budget -- in return for support for its battered government bonds from the ECB.

(Reporting by Walter Brandimarte and Daniel Bases In New York, Catherine Hornby and James Mackenzie in Rome; Editing by Gary Crosse)

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Fresh credit warnings as US lawmakers trade blame (AFP)

WASHINGTON (AFP) – Standard & Poor's warned Sunday that there was a one in three chance of a further US credit downgrade, as lawmakers traded blame for the failure to rein in the country's massive debt.

The ratings agency docked the United States from a sterling AAA to a AA+ rating on Friday largely because of the failure of bitterly divided US leaders to reach a consensus on containing the country's spiraling debt.

"If the fiscal position of the United States deteriorates further, or if the political gridlock becomes more entrenched, then that could lead to (another) downgrade," S&P ratings head John Chambers told ABC television.

"The outlook indicates at least a one in three chance of a downgrade" over the next six to 24 months, he said on the network's political talk show "This Week."

He added that in the past it has taken countries nine to 18 years to regain a AAA rating, and warned that "it would take, I think, more ability to reach consensus in Washington than what we're observing now."

But despite early signs that Friday's downgrade could roil world markets and warnings of a new recession by a former top White House economist, senior Democratic and Republican lawmakers continued to trade blame.

Senator John Kerry, a moderate Democrat, called Friday's move a "Tea Party downgrade," referring to the ultra-conservative anti-tax movement, and said a debt deal reached last week after weeks of heated negotiations fell short because some Republicans "were willing to shoot the hostage."

"What we need is a Washington that stops this bickering," Kerry told NBC's "Meet the Press."

The deal to cut some $2.5 trillion over 10 years in exchange for raising the congressionally-set debt ceiling fell short of the S&P's call for the United States to cut $4 trillion over the same period.

Senator John McCain, a moderate Republican also appearing on Meet the Press, blamed President Barack Obama, saying he had failed to put forth a specific plan for reining in debts and deficits.

"I agree that there is dysfunction in our system, but a lot of it has to do with the failure of the president to lead," he said.

He then echoed Kerry's call for civility, saying: "Lately the Democrats have been calling us terrorists, so we need to lower that level of rhetoric."

Obama's former top economic advisor Larry Summers, appearing on CNN's "State of the Union," meanwhile warned of a new recession and attacked the S&P downgrade as an unwarranted piling on atop an already weak economy.

Summers insisted the country could pay its bills and repeated allegations from administration officials that S&P's decision to downgrade was linked to a $2 trillion accounting error and its use of a faulty baseline.

McCain, however, defended the S&P, saying: "Don't shoot the messenger."

"Is there anybody that believes that S&P is wrong in their assessment of the fiscal situation of this country?" he asked.

Washington has been deeply divided over how to reduce its more than $14 trillion debt without further hobbling the sluggish economic recovery, and even the limited debt deal came after a bruising partisan battle.

Obama and his Democratic Party have called for a "balanced approach" in which the government would raise taxes on the rich and major corporations while making some cuts in entitlement programs.

The Republicans, particularly those close to the Tea Party, have adamantly ruled out any new tax revenues, which they say would slow the recovery and stifle job creation.

The S&P has declined to take sides on the debate over tax revenues and spending cuts, saying it is more important that Washington reach a durable consensus that would reassure world markets.

Markets had closed by the time the downgrade was announced on Friday, but there were early indications that the S&P move, along with spreading eurozone debt contagion, could make for a rough Monday opening.

The Israeli market fell some six percent Sunday and Gulf markets tumbled on opening, although they later trimmed some losses.

Fears of a global meltdown, which some analysts see as potentially worse than the 2008 collapse, sent vacationing world leaders scrambling in a flurry of phone calls from London to Paris to Washington to try to stem the tide.

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Credit Suisse unlikely to get help over U.S. tax probe (Reuters)

ZURICH (Reuters) – Switzerland's parliament would not vote for a second tax treaty to help settle U.S. charges that Credit Suisse bankers helped wealthy Americans evade taxes, Swiss politicians were quoted as saying on Sunday.

In 2009, the Swiss government cut a deal with Washington to hand over the details of 4,450 UBS bank accounts to the U.S. authorities to end a damaging lawsuit against the bank, lifting the veil on Switzerland's cherished tradition of banking secrecy that had helped it build up a multi-trillion-dollar offshore banking industry.

But politicians of various affiliations said there was little appetite for a second deal to help Credit Suisse, which is being probed by U.S. authorities as part of a broader investigation into banks suspected of helping Americans evade taxes.

"The enthusiasm to guarantee a bank state help again is very low," Christian Democrat (CVP) Pirmin Bischof was quoted as saying in the SonntagsZeitung.

This view was echoed by Free Democrat (FDP) Ruedi Noser in the NZZ am Sonntag newspaper.

"Parliament will not accept a second state treaty," he said.

Offshore tax havens have come under attack in recent years as cash-strapped governments seek to boost revenues in the wake of the financial crisis, forcing countries like Switzerland to pledge to cooperate more to help hunt tax cheats.

Last week U.S. authorities indicted three Credit Suisse private bankers for allegedly helping wealthy Americans evade taxes, bringing the total number of Credit Suisse bankers indicted to seven.

Despite their insistence Credit Suisse must solve its problems alone, the growing scrutiny from the U.S. has angered some politicians, potentially straining talks between the two countries on a multibillion dollar deal over Swiss banks helping Americans to shield their money from the U.S. taxman.

"If the U.S. is going to act in such a way Switzerland must break off negotiations for a political solution," Noser was cited as saying in the NZZ am Sonntag.

The talks had already become bogged down due to Swiss insistence any deal leave Swiss bankers free from prosecution in the United States, sources said last month.

The investigation against Credit Suisse has also prompted Swiss private banks Sarasin and Julius Baer to ban staff from traveling to the United States.

"For the last two weeks it has been necessary to get approval for all private and business trips to the U.S.," Sarasin spokesman Benedikt Gratzl told der Sonntag.

"It's about protection. So the bank and its employees will be protected from investigations and arrests," Gratzl said.

Julius Baer declined to comment to the paper and did not immediately respond to a request for comment from Reuters.

(Reporting by Caroline Copley; Editing by Erica Billingham)

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