Italy's debt rating is downgraded

Italy's Prodi said the rating cut was an 'expected alarm bell'

Italy has had its debt rating cut by Standard & Poor's and Fitch over concerns about plans to cut the state budget deficit and national debts.

The move comes after Italy published its 2007 budget and many analysts complained that it did not do enough to put the country's finances in order.

Italy is struggling to come to terms with pension and healthcare problems, as well as a lack of competitiveness.

Mr Prodi won elections in April by promising to improve Italy's finances.

European leader

Italy currently has the highest debt levels in the European Union, and is third in the world behind Japan and the US.

At the same time, its budget deficit is expected to hit 4.8% this year, well above the EU limit of 3% of gross domestic product.

Mr Prodi, who has a one-seat majority in Parliament, is trying to push through his 2007 budget by the end of this year.

Critics of the budget argue that it focuses on raising revenues, mainly through higher taxes, and does not take a heavy enough axe to state spending.

Part of the problem for Mr Prodi has been that he is head of a broad-ranging left-wing coalition that won the closest general election in Italy's tortured political history.

As a result, Mr Prodi has had to try to produce a budget that promoted business and economic interests at the same time as protecting workers' rights, the healthcare system and pension payments.

"The downgrade reflects the new government's inadequate response to Italy's structural economic and fiscal challenges," said S&P's credit analyst Moritz Kramer.

Next assessments

S&P cut Italy's debt rating to A+ from AA-, claiming that the 2007 budget would boost spending as a share of the total economy, rather than curbing it.

Fitch also said that it had cut Italy to AA-, stating that "deteriorating public finances and a sharp reduction in the primary surplus have raised Italy's vulnerability to shocks".

Mr Prodi has blamed Italy's economic problems on his predecessor, the billionaire Silvio Berlusconi, and said the rating cuts were "a largely expected alarm bell".

Mr Prodi added that "we are certain that the next assessments, which will take account of the economic policies of this government and not the situation inherited from the previous administration, will show positive signs".