The latest in a rash of credit rating reductions that has ensued since the onset of the Eurozone sovereign debt crisis occurred on July 9. One of the three major global credit ratings agencies, Standard & Poor’s, has cut its valuation on Italian government debt. Rome’s credit rating was cut from BBB plus to BBB. In addition to reducing the Italian sovereign debt credit rating by one notch, S & P posted a negative outlook on the Italian fiscal situation.
Italy is one of the so-called PIIGS nations, those entities in the Eurozone most vulnerable to fiscal and economic shocks. Despite the illusion that the European Central Bank has everything under control, Italy-like many other Eurozone nations, remains gripped and economically paralyzed by the ongoing sovereign debt crisis.
The Bundesbank opposes the move, and Germany’s traditional fear of inflationary policies by central bankers will no doubt be awakened. Draghi’s position is that he has no choice, if the euro is to be saved. His policy measure reminds me of what a U.S. Army officer once said, after his unit destroyed a village during the Vietnam War: “We had to destroy the village in order to save it.” Draghi may have unleashed a desperate policy measure which, in attempting to save the euro, will ultimately bring about its demise.