Moody's cuts Spain's credit rating by a notch

30th September 2010, Comments 0 comments

Moody's rating agency sliced Spain's credit rating on Thursday, a stinging blow to the government as it presents a belt-tightening budget the day after a general strike.

The agency cut Spain's top-ranked "Aaa" rating by a single notch to "Aa1", meaning the country will now have to pay more to borrow money on the international markets.

It was a sharp reminder of the costs if Spain fails to convince world financial markets it is determined to cut spending, reform labour markets and propel growth.

The greater fear in the markets had been a bigger, two-notch cut in the rating.

But Moody's said the government's 2011 tight-fisted budget plans, to be presented to parliament later in the day, convinced it to trim by just one notch.

Spanish unions called a general strike on Wednesday to protest against the very measures that Moody's is calling for: tough labour reforms and state spending cuts.

Tens of thousands also took to the streets in major cities in anger at the measures aimed at slashing a staggering 20-percent unemployment rate and reviving the economy.

The government may be conforted by the press reaction: the left-of-centre El Pais said the following was "limited" while the right-wing El Mundo headlined its front page "General Failure."

Moody's said the sluggish economy was a big factor in the cut.

"One of the key drivers for Moody's decision to downgrade Spain's rating to Aa1 is its weak growth prospects and the challenge that this presents for fiscal consolidation," said Moody's lead analyst for Spain, Kathrin Muehlbronner.

Over the next few years, the economy was likely to grow by an average 1.0 percent a year, below the average even among other sluggish European Union economies.

Another big factor in the ratings hit was Spain's deteriorating finances and the problems it faces cutting deficit with only moderate economic growth.

Moody's said it took into account the draft 2011 budget, which targets a cut in the general deficit to six percent of total annual economic output. But it warned more must be done.

"Although Moody's expects the government to broadly achieve its fiscal targets both this year and next, a further reduction in the deficit beyond 2011 is likely to require more fundamental spending reforms than the government has so far tabled."

Moody's had announced a review of Spain's credit rating for a possible downgrade three months ago, and was the last of the big three to trim the rating after Fitch and Standard and Poor's.

© 2010 AFP

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