Insurers face more pain as Italy is slashed closer to 'junk'

The crisis in the eurozone continued to escalate today after Moody’s downgraded Italy sovereign bonds two notches, leaving it hovering only two rungs above ‘junk’ status.

The downgrade is likely to be bad news for Aviva, Allianz and Generali which hold billions in Italian sovereign bonds to match their liabilities in the country.

Moody’s reduced Italy’s rating to Baa2 from A3, meaning borrowing costs are likely to grow and a full eurozone bailout looms larger. Italy remains on negative outlook.

“The risk of a Greek exit from the euro has risen, the Spanish banking system will experience greater credit losses than anticipated, and Spain’s own funding challenges are greater than previously recognised,” it said.

“Italy’s near-term economic outlook has deteriorated, as manifest in both weaker growth and higher unemployment, which creates risk of failure to meet fiscal consolidation targets.

“Failure to meet fiscal targets in turn could weaken market confidence further, raising the risk of a sudden stop in market funding.”