Ratings agency Standard & Poor’s has cut Italy's government debt rating to A/A-1 from A+/A-1+, reflecting its view of the Italian economy’s “weakening growth prospects”.

The outlook for the country is being held at negative.

High levels of per capita GDP, strong household and corporate balance sheets, and limited external imbalances were cited as the economy’s strengths.

On the other hand, weakening real and nominal growth prospects, “significant political impediments” to growth-enhancing reform, high gross and net general government debt, and “limited” commitment to expenditure cuts were cited as weaknesses.

More subdued external demand, government austerity measures, and upward pressure on funding costs in both the public and private sectors were picked to result in weaker growth for the Italian economy, compared with S&P’s May 2011 base-case expectations.

Commenting on the development, director of research, fixed income and currency at Baring Asset Management Nigel Sillis said that although the firm remains “very cautious” about the fixed income markets across Europe’s southern periphery, the fundamental story for Italy was viewed more favourably.

Compared to the likes of Ireland, Spain, and Portugal, Italy’s fiscal position was “more favourable”, with relatively low levels of private indebtedness. Sillis said that if the government successfully followed through on its plans for fiscal reform including the recently agreed €60bn austerity programme, then this could go some way to achieving a balanced budget by 2013.

“However, the task ahead for the Italian Government ought not to be underestimated. Current plans require measures of institutional reform, revenue expansion and cost cutting to an extent never before executed within this economy – there are sure to be both successes and failures along the way and the prospect remains for a period of heightened volatility across all Italian risk assets.”

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