Italian stocks plunge after Moody's credit warning

(MILAN) - The main Milan stock exchange index fell by more than two percent at the start of trading on Monday after Moody's warned it may cut Italy's credit rating in view of strains in the economy.

Banking stocks were among the worst affected, with shares in Intesa San Paolo dropping 2.42 percent to 1.775 euros and UniCredit plunging 2.36 percent to 1.487 euros following Moody's announcement on Friday.

Eurogroup head Jean-Claude Juncker also warned on Saturday that the euro crisis hitting Greece and others could affect Italy and Belgium, saying in an interview with a German daily: "We are playing with fire."

Luxembourg Prime Minister Juncker, who heads the group of eurozone finance ministers, told Suddeutsche Zeitung that the crisis could also hit, "due to their high levels of debt, Belgium and Italy, even before Spain."

The Italian government has committed to reducing its public deficit to 0.2 percent of gross domestic product (GDP), which would require an austerity plan of 40 billion euros (57 billion dollars) for 2013 and 2014.

The centre-right government is in trouble politically following two defeats at the polls in less than a month and its 25-billion-euro cuts for 2011 and 2012 unveiled last year sparked major social protests.

Moody's on Friday said it had placed Italy's Aa2 local and foreign currency government bond ratings "on review for possible downgrade, while affirming its short-term ratings at Prime-1."

"The Italian economy faces growth challenges in an environment characterized by long-term structural impediments to growth and potentially rising interest rates," the ratings agency said in a statement.

"Structural economic weaknesses -- mainly low productivity and important labor and product market rigidities -- have been a major impediment to growth in the last decade and continue to hinder the economy's recovery from the severe recession it experienced in 2009."