Italy's borrowing costs could surge and its financial situation could become more fragile if credit rating agency Moody's downgrades the country's creditworthiness on May 8. Moody's currently has Italy one step above junk status, so a downgrade would put Rome below investment grade. This would make many investors that have caps on the amount of risky debt they can hold dump Italian bonds. A downgrade would also reduce the market of available buyers for new Italian debt, as many investors, such as pension funds and insurance companies, only purchase investment-level bonds. In late April, Fitch also put Italy one notch above junk while Standard & Poor's kept it just two levels above it.

Italy's downgrade would also force the European Central Bank to increase its purchases of Italian debt in secondary markets to prevent a spike in Rome's borrowing costs. To do so, the ECB would have to exempt Rome from a rule that bars it from purchasing junk bonds. There is precedent for this exemption, as the ECB has recently started buying Greek debt, which some agencies rate below investment grade. The ECB has also authorized banks in the eurozone to present junk debt as collateral when requesting cheap loans from the institution. This is good news for Italian banks, which are the main holders of their country's debt and are particularly exposed to Italian bonds losing value. 
 
The problem is the ECB faces troubles of its own after Germany's Constitutional Court questioned the legality of its bond-purchasing program, commonly known as quantitative easing, on May 5. The German judges gave the ECB three months to justify the program or else they will ban the German central bank from participating in it. The ECB replied that it only answers to the European Court of Justice, which considers QE legal. But according to European media reports, the ECB is currently considering ways to provide German judges the explanation they demand without compromising its independence. The abrupt end of the ECB's bond-purchasing program at a time when Italy's borrowing costs are going up would increase the chances of an Italian default on its sovereign debt — something that could trigger a financial crisis in the eurozone.