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Published: Tuesday June 21, 2011 MYT 9:12:00 AM

Milan stocks down sharply after Moody's warning


MILAN (AP) - The Milan stock exchange closed down sharply Monday after ratings agency Moody's warned it may reduce Italy's credit rating and eurozone finance ministers failed to reach a deal on an immediate bailout for Greece.

The Milan benchmark FTSE MIB index dropped 2.01 percent to 19,692 points, recovering a bit from steeper losses on opening. The losses outpaced other European indices, which also suffered from the Greek debt impasse.

Moody's put Italy on warning over concerns about its ability to spur growth and reduce public debt, which at around 120 percent of GDP is one of the highest in Europe. It also cited fragile market sentiment for European countries with high levels of public debt, which pushes up borrowing costs.

The warning followed a similar move by Standard and Poor's, which cut its rating outlook for Italy's debt from stable to negative.

Moody's on Monday dealt Italy another blow after markets closed, placing several Italian-government related issuers on review for possible downgrade. These included energy companies Enel SpA and Eni SpA, engineering and construction company Finmeccanica SpA, Poste Italiane SpA, the nationwide postal service; and Terna-Rete Elettrica Nazionale SpA, an electricity company.

The Italian market losses were influenced not only by Moody's warning, but also by the fact financial stocks hurt by the Greek impasse are more heavily weighted in Milan.

Italian banks were some of the biggest losers, with Monte Paschi down 7 percent, Intesa Sanpaolo closed down .82 percent and Unicredit was down 2.3 percent. Oil stocks were also under pressure.

The real test for Italy - which will be a factor in determining whether it too will be struck by public debt market jitters - will be interim budget moves that Finance Minister Giulio Tremonti is expected to lay out by the end of the month. The maneuver will be considered by Moody's, which announced Friday it will evaluate whether to reduce Italy's Aa2 rating, following a similar move by Standard and Poor's.

The financial maneuver "is the crucial event," said Marco Valli, chief eurozone economist at Unicredit.

"It has to be a credible maneuver, with credible cuts and credible measures against evasion. Also measures that are not put off until 2013 and 2014, but that cover the entire timeframe," Valli said.

The government's key political ally, the Northern League, is pressuring Premier Silvio Berlusconi to lower taxes as one condition for its continued support. Berlusconi's government has been weakened by a pair of stunning electoral defeats, that also eroded support for the Northern League.

Berlusconi needs the League's support to complete his five-year term, ending in 2013.

Valli and other analysts said the warnings by Moody's and Standard & Poor's should give Tremonti leverage to say he cannot cut taxes now.

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