September 21st, 2011
12:05 PM GMT
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Editor's note:  Elisabeth Afseth has worked in bond markets for 17 years, starting out at Williams de Broe. She currently works as a fixed income analyst for Evolution Securities. She has an economics degree from the London School of Economics and a masters in economics from Oxford University.   

London (CNN) – Just when everyone was waiting for ratings agency Moody’s Investors Service to downgrade Italy, Standard & Poor’s gets in first with what is a much more damaging downgrade. S&P’s rating of Italy was already lowest of the three major agencies, and its downgrade from A+ to A, with a negative outlook, puts it three notches below Moody’s Aa2 rating (on watch for downgrade) and two notches below Fitch Ratings' AA-.

The financial markets largely shrugged off the downgrade. While bond yields on Italian sovereign debt - an indicator of risk - rose slightly, European equity markets were positive through the day.

Some have argued a downgrade was expected so therefore priced in. But it wasn’t this downgrade that was expected or priced in. It came from the agency with the lowest rating, which did not even have the sovereign on credit watch, but merely a negative outlook. Negative outlook generally means there is a one in three chance that the issuer may be downgraded within two years - it is much less of a warning of an imminent downgrade than a watch for downgrade.
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