Members of the European Union signed an agreement known as the Maastricht Treaty, under which they pledged to limit their deficit spending and debt levels. However, a number of European Union member states, including Greece and Italy, were able to circumvent these rules and mask their deficit and debt levels through the use of complex currency and credit derivatives structures. The structures were designed by prominent U.S. investment banks, who received substantial fees in return for their services and who took on little credit risk themselves thanks to special legal protections for derivatives counterparties. Financial reforms within the U.S. since the financial crisis have only served to reinforce special protections for derivatives--including greater access to government guarantees--while minimizing disclosure to broader financial markets.
Italy was hit hard by the economic crisis of 2007-2011. The national economy shrank by 6.76% during the whole period, totalizing seven quarters of recession. According to the EU's statistics body Eurostat, Italian public debt stood at 116% of GDP in 2010, ranking as the second biggest debt ratio after Greece (with 126.8%). However, the biggest chunk of Italian public debt is owned by national subjects, and relatively high levels of private savings and low levels of private indebtedness are seen as making it the safest among Europe's struggling economies. As a result of austerity measures passed in December 2010, Italy is targeting a public budget deficit of 3.9% in 2011 and 2.7% in 2012, both among the lowest in the European Union.
In September 19, 2011 Standard & Poor's downgraded Italian sovereign debt to "A/A-1" from a "A+/A-1+" grade because of "Italy's weakening economic growth prospects." Italy has also weak coalition government would "limit the government's ability to respond decisively" to events. In October 4, 2011 rating agency Moody's slashed Italy's government bond rating by 3 notches from Aa2 to A2 with negative outlook, citing risks for the financing of long-term debt and slow economic growth. The rating is parallel to Standard and Poor's assesment of single A. Both rating agencies give a negative outlook on the debt, meaning further downgrades are possible.