Moody's to conclude Italy review within month

NEW YORK (Reuters) - Moody's Investors Service on Friday said it would finish reviewing Italy's Aa2 sovereign currency credit rating for possible downgrade within the next month, saying Italy faces a challenging economic and financial environment.

Moody's put Italy's rating on review in June, and fear that it would downgrade the country, the third largest economy in the euro zone, this week sent Italian and French bank shares down sharply.

France's BNP Paribas and Credit Agricole and Italy's UniCredit shed 7 percent each even though the overall market was higher for a fourth straight day. Investors fear a downgrade would hurt banks with large holdings of Italian government debt.

Moody's cited structural weaknesses such as a rigid labor market, rising debt financing costs and risks to a plan to reduce Italy's overall debt burden.

Italy has one of the largest public debt burdens in the world, equivalent to about 120 percent of gross domestic product. After Greece, that is the largest ratio in the 17-country euro zone.

Until last spring, Italy was an afterthought in the euro zone debt crisis, insulated by a modest budget deficit, a high rate of private savings and a generally conservative financial and banking system.

But while Italy has not followed Greece, Ireland and Portugal in seeking emergency aid, it has faced higher borrowing costs as debt worries have spurred investors to demand higher returns to buy its government bonds.

The European Central Bank said it bought another 14 billion euros in euro zone government debt last week to hold down countries' borrowing costs and now holds 143 billion euros in Italian, Spanish, Greek, Portuguese and Irish government bonds.

A fractious political climate that has hindered reform has unnerved investors, too. Italy's center-right government has struggled to get its finances in order, and a 54 billion euro austerity plan aimed at balancing the budget by 2013 was overhauled four times before being presented to parliament.

The Bank of Italy is forecasting growth of less than 1 percent this year and next. Many private sector economists are even more pessimistic, with several expecting Italy to tip back into recession in 2012.

Standard & Poor's has Italy at A-plus with a negative outlook while Fitch Ratings has it at AA-minus with a stable outlook.

Moody's rating is two notches above S&P and one notch above Fitch. Moody's rating is two notches below the gold-plated Aaa status.

(Reporting by Steven C. Johnson and Daniel Bases in New York and James Mackenzie in Milan; Editing by Leslie Adler)