Moody's investors service warned on Friday that it may cut Italy's sovereign credit ratings from the current Aa2, citing economic growth challenges and the potential of higher borrowing costs.
Moody's said in a statement that it has placed Italy's credit ratings under review for a possible downgrade and affirmed the European nation's short-term Prime-1 ratings.
"Moody's review of Italy's sovereign rating will focus on the growth prospects for the Italian economy in coming years, and particularly the prospects for a removal of important structural bottlenecks that could hinder a stronger economic recovery in the medium term," the ratings agency said.
It said that Italy's economy has structural weaknesses like low productivity and "labor and product market rigidities," and the debt-burdened country also faces risks for the implementation of fiscal austerity plans.
Italy had debt of about 1.8 trillion euros (2.6 trillion U.S. dollars) at the end of last year and a ratio of debt to gross domestic product of about 119 percent.
The annualized yield on two-year Italian bonds has risen from 2. 30 percent in mid-March to 2.99 percent now, but is still well below the 28.8 percent the market is demanding on two-year Greek bonds, and the 13.03 percent yield that two-year Portuguese bonds pay.
Italy's 10-year government bond spreads narrowed on Friday by 9 basis points to 186 basis points over the benchmark German bonds, still staying at a high level.
Standard & Poor's has Italy's long-term sovereign credit rating at A+ with a negative outlook. Fitch ratings is in between S&P and Moody's with an AA- rating and stable outlook.