Moody's downgrades Italy

@CNNMoney October 4, 2011: 6:13 PM ET

NEW YORK (CNNMoney) -- In another sign of the tough financial conditions in Europe, Moody's on Tuesday cut Italy's credit rating by three notches and assigned it a "negative outlook."

While that's a notable drop, the new rating -- A2 -- is still comparatively high and Moody's noted that "the risk of default by Italy remains remote."

But the increasing risks posed by the debt crisis in Europe underpinned Moody's decision.

The credit rating agency said it was concerned that Italy may have to pay more to borrow, noting that the country will have to refinance more than €200 billion in debt next year.

Europe's debt crisis: 5 things you need to know

Moody's cited "the fragile market sentiment" in the euro area that is likely to result in "materially increased financing costs and funding risks."

In a separate statement Tuesday, Moody's said it expected weak market conditions to persist.

Moody's also called out Italy's "structural economic weaknesses" -- among them low productivity, which has been an "impediment" to economic recovery.

Lastly, the ratings agency expressed concern that Italy might not meet its debt reduction targets and that could make it more susceptible to market shocks.

"Since more than half of the consolidation measures are based on government revenue growth, the plans are vulnerable to the high level of uncertainty around economic growth in Italy and elsewhere in the EU," the agency said.

Moody's said it expects Italy's public debt-to-GDP ratio to hit 120% by the end of this year, up from 104% at the start of the global financial crisis.

Moody's action comes two weeks after Standard & Poor's cut Italy's sovereign credit rating to A from A+, and said its outlook on the rating remained negative. To top of page

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