Italian corporates remained under more pressure than a papal conclave on Tuesday, bucking the rally in the broader market.

Telecom Italia was comfortably the worst performer in the European investment grade universe after it was downgraded to Baa3 by Moody's.

The rating agency said the Italian telecoms operator failed to meet its 2012 net debt target and has scaled back its debt reduction expectations for the current year. Weaker cash flow and the challenging conditions in the company's domestic markets were cited as additional reasons for the downgrade.

Earnings announced last week were disappointing and the company said it will cut its dividend, as well as issue subordinated hybrid debt. This is an awkward attempt to maintain balance sheet strength while raising the necessary funds for capital expenditure.

Telecom Italia's spreads widened 20bps to 346bps today, and have given back over 100bps since early January.

Finmeccanica was another Italian credit under scrutiny on Tuesday. Giuseppe Orsi, chairman and ceo of the defence company, , was arrested by Italian police in connection with a corruption case involving the sale of helicopters to India.

Spreads in the junk-rated Finmeccanica widened 19bps to 365bps and it was the worst performer in the Markit iTraxx Crossover index.

Outside of Italy the credit markets were in a relatively buoyant mood, with the main indices rallying and the majority of single names tightening. The economic calendar was fairly light and there was little for the markets to get their teeth into.

Headlines ahead of the Group of 20 industrialised and developing nations meeting on Friday, where the topic of competitive devaluations is likely to be high on the agenda, could influence sentiment in the coming days.

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