2) The Italian economy continues to face significant challenges due to structural economic weaknesses. These problems -- mainly low productivity and important labour and product market rigidities -- have been an impediment to the achievement of higher potential growth rates over the past decade and continue to hinder the economy's recovery from the severe recession it experienced in 2009. These structural impediments to economic growth cannot be removed quickly. The government's reform plans have only just started to address some of these structural challenges, and they need to be implemented efficiently. Moreover, moderate medium-term growth prospects for the Italian economy have been further revised downwards due to potential adverse effects of a weakening European and global growth outlook. Economic growth will be a crucial factor determining the government's revenues, the achievement of fiscal consolidation targets and, ultimately, its debt trajectory.

3) Finally, there is increasing uncertainty for the government to achieve fiscal consolidation targets. 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. Moreover, political consensus on additional expenditure cuts can be difficult to achieve. As a consequence, the government may find it challenging to generate the primary surpluses that are needed to place the public debt-to-GDP ratio and the interest burden on a solid downward trend. Moody's expects Italy's public debt-to-GDP ratio to reach 120% at the end of this year, up from 104% at the start of the global crisis. As well as posing a risk to Italy's financial strength, which is a key consideration under Moody's sovereign methodology, failure to achieve fiscal and debt targets could increase the country's susceptibility to financial market shocks.

PRINCIPAL METHODOLOGY
The principal methodology used in this rating was Sovereign Bond Ratings published in September 2008. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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