Italy downgraded amid continuing eurozone fears

Italy's credit rating has been downgraded by the Egan-Jones agency amid continuing fears about its sluggish economy and the wider impact of the debt crisis, while speculation has grown that Spain will require a full bail-out and Greece will be forced to leave the single currency.

The American rating agency last night moved Italy's credit score deeper into junk territory, lowering it from B+ to CCC+ with a negative outlook, meaning further downgrades might follow. In a statement Egan-Jones – not one of the big three rating agencies – said Italy would "probably" have to provide more support to its banks, but its ability to do so independently was "questionable given the country's and the banks' weak condition".

Noting that Italy is "currently in recession with economic contraction over a couple of quarters", the rating agency added that the government's high cost of borrowing exacerbated credit pressures. It warned that Italy would not be able to continue to support its debt – expected to exceed 125 per cent of gross domestic product by the end of this year – if the European economy falters further and its borrowing costs rise further.

However, this morning the yield on 10-year Italian bond was stable at 6.4 per cent, with markets generally calmer after a turbulent start to the week. The country's borrowing costs had risen partly over fears that Spain might be forced to request a full sovereign bail-out, as a number of its autonomous regions including Catalonia are reportedly set to turn to the Madrid government for help meeting their financing needs. Eurozone countries have already agreed to lend Spain up to €100bn to shore up its struggling banking system.

Today the think-tank Open Europe said the most likely scenario for Spain was a "precautionary loan of €155bn combined with more European Central Bank liquidity". But it cautioned that even that would only buy six months to a year of respite. "The regions will not make or break Spain financially, but their bail-out requests show how politically difficult it will be for Spain to rein in spending and reform," said Open Europe's Raoul Ruparel.

Spain's funding needs amount to €542bn by mid-2015, with banks requiring €100bn on top of this, according to Open Europe. "The current bank rescue plan is clearly insufficient, while a full bail-out – which could be in the region of €650bn – is impossible," said Ruparel. There is only €500bn remaining in the coffers of the EU's emergency rescue funds following the bail-outs of Greece, Ireland and Portugal.

Elsewhere today European Commission President José Manuel Barroso has travelled to Greece for the first time in three years and will hold talks with Prime Minister Antonis Samaras, whose coalition government, in power since June, is set to announce an additional €11.5bn of austerity measures.

The troika of the commission, the ECB and the International Monetary Fund are currently assessing Greece's progress in meeting the terms of its bail-outs and deciding whether it should receive the next €31.5bn of installments. Wall Street bank Citibank said this morning that it saw a 90 per cent chance of Greece leaving the eurozone in the next 18 months, adding that it was still "gloomy" about Europe's prospects.

But speaking in London today, ECB president Mario Draghi said the euro was "much stronger" than people acknowledged. He added: "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough."