By Giuseppe Fonte
ROME (Reuters) - Italy will bring forward to next month plans for slicing 35-40 billion euros ($50-$56 billion) off its budget deficit, government sources said on Monday, moving to reassure markets after a credit rating warning.
The measures aim to balance the budget in 2014.
One source told Reuters the center-right government was bringing forward the plan "to give a signal to the markets" after Standard & Poor's cut its outlook for Italy's A+ rating to "negative" from "stable" on Saturday.
"The government will issue a decree (containing the deficit cutting plan) in June," a second source said on condition of anonymity.
The decree, designed to cut the deficit in 2013 and 2014, must be approved by parliament within 60 days.
"(A decree before the summer) could contribute to reassuring the markets on Italy's public accounts," said one of the sources.
According to the EU stability pact, Italy could have waited until September to announce the measures.
Only the timing of the deficit reduction plan has changed, as the size of the intervention was already penciled in by the government. Last year its rolling three-year deficit cutting plan was presented in July.
The yield spread between Italian and German government bonds widened on Monday to its biggest since January after S&P's surprise move, though analysts said they expected the reaction would be relatively shortlived.
The cost of insuring Italian government debt against default also rose, with five-year credit default swaps (CDS) rising 15 basis points to 176 bps, according to data monitor Markit.
"S&P's negative outlook should be regarded mostly as a wake-up call to the Italian government," Unicredit said in a research note to clients.
It forecast that the outlook revision should be "not too detrimental" to auctions of Italian government bonds of various maturities due on Thursday.
MOODY'S FITCH UNMOVED
Fellow ratings agencies Moody's and Fitch both reiterated their stable outlook on Italy.
Moody's declined any further comment, while Fitch analyst David Riley told Reuters that at present no change was envisaged in Fitch's stance.
"There is no evidence Italy's budget position is deteriorating," he told Reuters.
S&P said its decision was not due to a recent deterioration in the budget position but to Italy's chronically weak economic growth which, combined with a lack of reforms, undermines the prospects for significantly reducing its huge stock of debt.
The country's public debt reached 119 percent of gross domestic product at the end of last year -- second only to Greece in the euro zone.
"In our view Italy's current growth prospects are weak, and the political commitment for productivity-enhancing reforms appears to be faltering," it said in its statement.
Economy Minister Giulio Tremonti said on Monday that Italy has "kept things in order and the bases are all there for us to continue to do so."
S&P's move comes at a difficult time for Prime Minister Silvio Berlusconi, whose popularity has fallen sharply in recent months and whose center-right coalition fared badly in local elections on May 15-16.
The incumbent center-right mayor of Milan, Berlusconi's home city, is lagging her opponent ahead of a run-off ballot next weekend which could take Milan to the left for the first time in 18 years and deal a huge blow to Berlusconi.
Civil Service Minister Renato Brunetta said the government would "adopt various measures to control accounts and help growth in the coming months," but the opposition said Berlusconi had lost all credibility.
"In response to S&P's warning the ministers of this government, including Brunetta, indulge in propaganda without any substance, showing their inadequacy for the umpteenth time," said Marizio Zipponi, a lawmaker for Italy of Values party.
Milan's blue-chip FTSE Mib index was down almost 3 percent by midday, twice the downturn in the FTSEurofirst 300 index. However, traders said the drop was caused largely by ex-dividend trading in about 50 stocks.
"There's almost no impact from the outlook cut. In fact the bourse is doing better than others in Europe" when the ex-dividend impact is discounted, a dealer said.
(Additional reporting by Ian Simpson, Giulio Piovaccari, Stefano Bernabei, Gavin Jones; Writing by Gavin Jones and Silvia Aloisi; Editing by John Stonestreet/Ruth Pitchford)