Moody's downgrades Spain credit

10th March 2011, Comments 0 comments

Moody's sliced Spain's credit rating Thursday and warned it may do so again, pounding financial markets as it raised the alarm over Spanish banking woes and spendthrift regions.

New York-based Moody's cut the long-term debt rating by a notch to "Aa2" with a negative outlook, a serious setback to Spain's efforts to quell fears it may need an international financial rescue.

The downgrade came on the eve of a eurozone summit in Brussels to discuss bolstering the euro's defences against speculation that weak economies such as Portugal may follow Ireland and Greece into crises.

Markets tumbled after the announcement.

The euro retreated to $1.3817 after the downgrade from $1.3868 a few hours earlier. The Madrid stock market's IBEX-35 index slipped 1.29 percent to 10,423.3 in mid-morning trade.

The risk premium on Spanish 10-year bonds -- the extra interest rate demanded by markets when compared to safer-bet German bunds -- rose to 225 basis points from 222 the previous day and 204 a week earlier.

Moody's Investors Service expressed scepticism about Madrid's assumption it can clean up savings banks' balance sheets at a cost of less than 20 billion euros ($28 billion).

"The eventual cost of bank restructuring will exceed the government's current assumptions, leading to a further increase in the public debt ratio," it said in a statement.

Moody's put the likely price at 50 billion euros.

Spain's savings banks are still struggling under the weight of loans that turned sour after the 2008 property bubble collapse.

The agency said it also had concerns over Spain's efforts to create sustainable public finances, given the limits of Madrid's control over the regional governments' spending.

Spain's government bristled at the downgrade.

Moody's doubts about the costs of cleaning up the banks could have been resolved "simply by waiting until this afternoon for the Bank of Spain to confirm the necessary amounts," Finance Minister Elena Salgado said.

The finance minister agreed however that more should be done to control spending by semi-autonomous regional governments.

French bank Natixis' Spanish analyst Jesus Castillo said the costs of recapitalising the banks should be manageable, even if higher than expected, but warned that the big problem was weak economic growth.

"We are more concerned by the ability of the Spanish economy to recover a solid growth path able to reduce the large unemployment rate -- more than 20 percent at the end of 2010 -- and to allow a fiscal consolidation in the mid term," Castillo said.

Madrid has raised sales taxes, frozen old age pensions, cut public workers' wages by five percent, forced banks to strengthen their balance sheets, raised the retirement age and made it easier for firms to hire and fire.

The government said last week it had trimmed the public deficit to 9.24 percent of total economic output in 2010 from 11.1 percent in 2009, narrowly beating its target of 9.3 percent.

Madrid has vowed to drive its public deficit below the European Union limit of 3.0 percent of gross domestic product by 2013.

Spain's new "Aa2" rating, though still considered high quality, will tend to raise the cost of borrowing from financial markets.

The central and regional governments and the banks need to raise a combined 290 billion euros in gross debt including rollovers in 2011, according to Moody's.

"Spain's vulnerability to market disruption remains elevated given the high funding requirements, not only for the sovereign but also for the regional governments and the banks," Moody's said.

© 2011 AFP

0 Comments To This Article