Italy's near-term economic outlook has deteriorated, as manifest in both weaker growth and higher unemployment, which creates risk of failure to meet fiscal consolidation targets. Failure to meet fiscal targets in turn could weaken market confidence further, raising the risk of a sudden stop in market funding.
Etc, etc.
If Fitch follows suit, downgrades will force a cascade of selling by Asian funds and others with strict limits on the kind of debt they can hold. These investors stopped buying Italian debt months ago, or course. But they did not sell either. They will.
Moody's is basically saying that the drastic austerity imposed on Italy by the ECB after its late summer Putsch (switching bond purchases on and off to force Silvio Berlusconi out of power) is itself the cause of the deepening crisis.
The contractionary policy mix has been calamitous. The ECB allowed – or rather caused – the Italian M1 and M3 money supply to collapse at Great Depression rates last year by tightening monetary policy into the slump. This was one of the worst episodes of policy error of the last half-century.
The result of this combined monetary and fiscal squeeze is an entirely avoidable and very damaging double-dip recession. Italy’s Confindustria warns that the economy will shrink by 2.4pc this year alone and perhaps a lot more, adding for good measure that austerity overkill is reducing the country to "social rubble".
This 1930s medicine is the chief reason why Italy's once-stable debt trajectory has suddenly turned ugly, with the public debt to GDP galloping up to 126pc of GDP this year according to the IMF.
Moody's seems to go along with the "fiscal consolidation" goals imposed on the country by Berlin, Frankfurt and Brussels.
It should not do so. The demands are poisonous. Italy already has a primary budget surplus. This will rise to 3.6pc of GDP this year, and 4.9pc next year.
This is by far the "best" fiscal profile in the G7 bloc, yet it is a pyrrhic achievement. The recessionary effects are overwhelming the gains. The debt is accelerating upwards. The industrial structure of the country is being bled white.
The political result is the spectacular rise of Beppe Grillo, the scourge of the euro and now master of Parma. Mr Berlusconi can already sniff his opportunity, launching a comeback on an anti-Merkel, anti-German, anti-ECB, and anti-Europe platform.
"It is not blasphemy to talk of leaving the euro," he says, calling for a return to the lira unless the ECB delivers on its side of the bargain by capping Italian bond yields.
Euro exit would "have its advantages", he says. "Devaluation would allow us to export. We will finish up in a worsening recessionary spiral if we keep going with Mrs Merkel's policies."
Personally, I was stunned by the level of bitterness on a trip to Rome three weeks ago. One senior official – a long-standing supporter of EMU, and one of its custodians – told me the euro was "basically dead".
Barely 30pc of Italians now think the euro has been a "good idea" (Pew Trust). They certainly have good reason to feel aggrieved. Italy is not fundamentally a basket case. It has been turned into a basket case by the perverse mechanisms of the euro itself.
Combined public and private debt is 260pc of GDP, similar to Germany and much lower than in France, Spain, the Netherlands, Denmark, the UK, the US or Japan. With private wealth of €8.6 trillion, Italians are richer per capita than Germans.
Italy scores top on the IMF's long-term debt sustainability indicator at 4.1, ahead of Germany 4.6, France 7.9, the UK 13.3, Japan 14.3, and the US 17. It is one of the very few countries that has sorted out its pension crisis.
Their one big problem is that they are in the wrong currency.
As we all know by now, they have lost 30pc or so in unit labour cost competitiveness against Germany since the launch of EMU because of the slow ratchet effect of wage inflation and poor productivity growth. The damage has been done. You cannot set the clock back.
Italy's historic trade surplus with Germany has switched into a big structural deficit, locked in permanently by the effects of EMU.
They have little hope of clawing back the lost ground through wage deflation and an "internal devaluation" since that will play further havoc with debt dynamics, if it does not lead to street revolution first.
David Woo from Bank of America has just written a "game theory" study of the eurozone arguing that Italy would benefit more than any other country (except Ireland) from breaking free and restoring sovereign control over its policy instruments.
This gives Italy a lot of leverage in a showdown with Germany … though whether Wolfgang Schauble understands that is an other matter.
The country's primary surplus implies that it can leave EMU at any moment of its choosing (unlike Greece, Spain, or Portugal), and it is big enough to go it alone. Its international investment position is only slightly negative (unlike Spain, in the red to the tune of 92pc of GDP).
Italy's very high savings rate and private wealth mean that any interest rate shock would mostly be rotated back into the economy in higher payments to Italian bondholders. The macro-effects would even out.
Nor do I accept the usual mantra that Italy's interest rates would soar post-exit. They have already soared in real terms (even if they are lower today in nominal terms than during the lira days).
Indeed, a counter case can be made that the only way for Italy to bring down its real borrowing costs at this stage is to leave the euro immediately.
Italians will of course decide their own destiny.
On holiday in Italy, I read Arrigo Petacco's excellent account of the Second World War from the Italian point of view, La Nostra Guerra 1940-1945.
The theme that struck me most was how many of Italy's defeats and disasters were the result of errors committed by the German high command itself, especially by Rommel.
British subs were sinking 80pc of Italian resupply convoys to North Africa because the British had penetrated the German Enigma codes, and German officers were needlessly relaying all the convoy details back to their own HQ. Yet Rommel blamed it all on the Rome, saying, unfairly, there must be spies in the Italian navy.
History is repeating itself – peacefully this time. Italy no longer has anything to gain from listening to destructive German advice, or from persisting with this suffocating misadventure. We await a latter-day variant of the Badoglio message in September 8 1943.
All of a sudden, Italy did the unthinkable. Italians listening to their radio at 18.15 that evening discovered to their amazement – and mostly relief – that they were no longer committed to further madness.
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