Moody's downgrades Italian bonds

Credit rating agency Moody's Investors Service downgraded Italian government bonds Tuesday by three notches.

Moody's made its announcement after the close of North American markets.

That means that banks have become less willing to lend to each other out of concerns about the market value of the bonds of debt-burdened governments in Italy, Greece, Portugal, Ireland and Spain held on their balance sheets

Those bonds are used as collateral in inter-bank lending. Banks less able to borrow themselves have less cashto lend to businesses and consumers.

The size of the ratings cut, Moody's said, reflects its concerns with recent turmoil in financial markets, which has heightened the risk that Italy's borrowing costs could suddenly soar.

Thechange still meansItalian government debt is investment grade, meaning conservatively managed pension funds and other large investors may still buy them.

Cut follows S&P downgrade

The action follows the Sept. 19 one-notch downgrade by Standard & Poor's Ratings Services, which cut Italy's long- and short-term sovereign credit ratings to A/A-1.

S&P analysts cited weakening economic growth for the nation and higher-than-expected levels of government debt.

The European Central Bank had demanded stiff austerity measures but doubts persist about how serious Italy is about coming to grips with its debt.

The downgrade came the same day as shares in Dexia, a bank jointly based in France and Belgium,continued to sell offdespite assurances from the governments of both countries that they would prop up the lender, which is highly exposed to Greek government debt.