Did we see the eurozone financial crisis step up a notch late on Saturday?

While latest fears over Greece's financial position and bailout intensify, there's a new economy to worry about.

Not fellow bailouts, Portugal and Ireland, or the country said to be next on all the lists, Spain.

But Italy, Europe's third biggest economy.

While Italy was also seen as being in a difficult situation with high debt, low growth, spending imbalances and political uncertainty, there had been no sign of a move against it by rating agencies.

That changed Friday when Standard & Poor's changed the outlook on the country's A plus rating to negative from stable.

The negative outlook implies a one-in-three chance that Italy's ratings could be lowered within the next 24 months. (And a two a two in three chance it won't be cut).

S&P has a much tougher view of Italy's financial state than other raters.

Moody's currently has an "Aa2" rating for Italy, while Fitch rates it at "AA-", which means S&P has Italy two notches below Moody's and one below Fitch.

Italy had its credit-rating outlook lowered to negative from stable by Standard & Poor's, which cited the nation's slowing economic growth and "diminished" prospects for a reduction of government debt, according to an S&P statement.

S&P affirmed Italy's A+ long-term rating, the fifth-highest, and its top-ranked A-1+ short-term rating.

That is usually a warning shot fired at a complacent or slack government (which is what S&P did in late April when it cut America's rating outlook to negative from stable).

S&P's move came hours after Fitch slashed Greece's rating, warning that the country faced big challenges in turning round its reversing economy.

Fitch Ratings yesterday cut Greece's long-term debt rating to B+, four steps below investment grade, and placed it on rating watch negative.

And Fitch warned that a much discussed extension of the country's bond maturities (as a way of lessening the tightening financial pressures on the economy) would be considered "a default event."

As a result, Greek 10-year bond yields surged to a record 16.6% on Friday, which signals that the market can only see collapse and default.

As well, promised Greek economic reform plans were delayed, sparking fears in the financial markets over the country's ability to rein back its mounting public debt.

Italy's Treasury said after the move by S&P that it will "intensify" structural changes in the economy and push ahead with measures to balance the budget by 2014.


"With regard to the economy, the government has initiated and will intensify its reforms; in regard to the budget, a phase of measures are in advanced preparation in order to balance the budget by 2014," the Treasury said.

It also said the measures will be submitted to the Parliament for approval by July.

In its ratings statement, S&P said Italy's "current growth prospects are weak, and the political commitment for productivity-enhancing reforms appears to be faltering," S&P said.

"Potential political gridlock could contribute to fiscal slippage. As a result, we believe Italy's prospects for reducing its general government debt have diminished."

The Italian economy expanded 0.1% in the first quarter, less than expected by the market (Even Greece saw a surprise 0.8% expansion).

According to a report this month from the OECD, the Italian economy won't return to its pre-recession level for at least another two years, and the $US2.3 trillion economy needs to raise productivity.

S&P said "diminished growth prospects stem from what we consider to be a lack of political commitment to deregulating the labor market and introducing reforms to boost productivity."

"We believe measures to reduce the bottlenecks and rigidities in Italy's economy are especially important in light of Italy's limited monetary flexibility."

The government last month cut its forecast for economic growth in 2011 to 1.1% and 1.3% in 2012. The previous forecasts were 1.3% for this year and 2% for next year.

A Fitch analyst underlined Greece's worsening financial position when he told Reuters Friday night that Greece will not be able to return to bond markets before mid-2013 and will need more funding beyond that point.,

"We think it unlikely that Greece will be able to return to the bond market by mid-2013," Fitch senior director Paul Rawkins told Reuters.

"We would expect new aid to Greece to extend beyond May 2013, when the current EU/IMF program expires," he added.

"It should probably be long enough for Greece to get a recovery in place, the fiscal position to be looking much better and the debt to be beginning to come down."

That means Greece will need more money from the EU and the IMF, and its banks will need to be financial helped by the European Central Bank.

The ECB made clear on Friday that any sort of default (such as extending the maturities of the country's debt, which is called changing the debt profile), would means the country's banks would not get any more support from the ECB.

That would mean financial collapse and worse for the country whose banks would be crippled by the cutting off of aid from the ECB.

The Greek cabinet meets tonight, our time to try and get agreement on the delayed austerity plans.

A public opinion poll reported at the weekend in Athens that 80% of Greeks would opose more cuts.

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