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 presented 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 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, which were presented to parliament a few hours later, convinced it to trim by a single notch.

The Spanish stock market shrugged off the downgrade. The benchmark Ibex-35 most traded share index closed up 0.26 percent at 10,514.50 points.

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 public sector wage cut of five percent, and plans to gradually raise the retirement age to 67 from 65.

Prime Minister Jose Luis Rodriguez Zapatero may be comforted by the press reaction -- the left-of-centre El Pais said support for the strike 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 ratings 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, it said.

The Bank of Spain warned in a monthly report Thursday that Spanish economic activity "may have weakened" in the third quarter of this year after growing slightly in the first half.

Another big factor in the rating agency's downgrade was Spain's deteriorating finances and the problems it faces cutting its deficit while growth is only moderate.

Moody's said it took into account the 2011 budget, which targets a cut in the public deficit to six percent of total annual economic output from 9.3 percent this year.

But it warned the government must craft more fundamental reforms than it has so far tabled if it wants to reduce the deficit further after 2011.

Presenting the budget to parliament, Finance Minister Elena Salgado said the government would not waver in its reform plans.

The tight budget "is the only way to protect the country in the face of financial markets that are still volatile and have some elements of instability," Salgado said.

"We are going to spend less in many areas," she added.

"The economic policy will be maintained. There will be austerity. There will be reforms."

Moody's also 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.

© 2010 AFP

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