Fitch: Italy 'already in recession'

"Italy is likely already in recession and the downturn in activity across the euro zone has rendered the task of the new government much more difficult," the ratings agency said in a statement.

Fitch, which downgraded Italy to A+ from AA- with a negative outlook last month, warned it would cut the country's ratings to the low investment grade category if it were unable to borrow at sustainable rates on the markets.

"Sustaining political and public support for structural reforms and austerity will be challenging in the face of rising unemployment. Convincing investors that the reforms will be effectively implemented and will boost economic growth over the medium term will be equally if not more challenging," it added.

Italy's borrowing costs hovered close to euro-era highs on Thursday, with yields on 10-year bonds touching 7.1pc early in the day - past the levels that forced its smaller neighbours Greece and Portugal to seek a bail-out.

The country has to refinance €312bn (£267bn) of debt next year. Fitch said Italian bond yields had risen to a level which, if protracted, would place public debt on an unsustainable path.

"In the event that the Italian government loses market access -- not Fitch's base case -- the ratings would be lowered, likely to the low investment grade category."

Italy's new prime minister, Mario Monti, said the euro zone's third-largest economy faces an emergency, and he promised sweeping but fair reforms to dig the country out of a major financial crisis.

Monti's government of technocrats must pursue fiscal and structural economic reforms but the downturn in Italy and Europe will complicate his job, Fitch said.

Analysts say Italy's 1.8 trillion euro public debt -- the third-largest in the world -- would overwhelm the euro zone's current financial defences if the country had to ask for help like its smaller EU partners did.

The Telegraph