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 sharp 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 for long-term government bonds by a 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 stakes 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 New York-based Moody's Investors Service said the government's 2011 tight-fisted budget plans, to be presented to parliament later in the day, convinced it to trim by a single notch.

Spain's 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 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.

Unions are also angered by steep spending cuts, including an average state employee salary reduction of five percent, and plans to gradually raise the retirement age to 67 from 65.

Prime Minister Jose Luis Rodriguez Zapatero may be conforted by the day-after press reaction: the left-of-centre El Pais said the strike following was "limited" while the right-wing El Mundo headlined its front page "General Failure."

Zapatero's deputy, Maria Teresa Fernandez de la Vega, noted that Moody's had welcomed the government measures and she hoped the agency "will soon give us back the rating that it should never have taken away."

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 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."

And the agency called for deeper reforms to the labour market.

"The rating agency considers the recently introduced labour market reforms and the broad wage restraint in both private and public sectors to be important steps in the right direction," it said.

"However, dismissal costs will remain above the EU average and wage flexibility more limited than in many Aaa-rated peers."

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.

The agency left untouched the top-rank rating for Spain's short-term debt of Prime-1.

Moody's cut the long-term debt rating for the government-backed fund for restructuring of the banking sector, Fondo de Reestructuracion Ordenada Bancaria, by a notch to Aa1 in line with state debt.

© 2010 AFP

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