Moody's puts Spain 'on review' for downgrade

30th June 2010, Comments 0 comments

Moody's Investor Service warned Spain on Wednesday it had placed the country's sovereign debt rating "on review for possible downgrade" due to the weak growth prospects of its fragile economy.

The credit rating agency said it could lower Spain's Aaa rating by "one, or at most two, notches" at the end of the three-month review period.

"Moody's Investors Service has today placed Spain's Aaa local and foreign currency government bond ratings on review for possible downgrade," it said.

The decision was prompted by "the deteriorating (short-term and long-term) economic growth prospects", by "the challenges the government faces in achieving its fiscal targets" and by "concerns over the impact of rising funding costs over the medium term."

The warning followed a decision by another ratings agency, Fitch, on May 29 to cut Spain's credit rating one notch from the maximum AAA to AA+, arguing that the economic recovery will be more muted than that forecast by the government.

"Spain's growth prospects are weaker than those of other Aaa-rated sovereigns," said Kathrin Muehlbronner, a Moody's vice president and lead analyst for the country.

"In the short term, the government's accelerated fiscal consolidation combined with the higher borrowing costs currently facing the government, consumers, and businesses will likely depress growth."

Last month, Spain became the last of Europe's big economies to emerge from recession, with official data showing fragile growth of 0.1 percent in the first quarter.

The country slipped went into recession at the end of 2008 as the global financial meltdown compounded a collapse of the Spanish property market, which had been a major driver for growth in the preceding years.

The recession sent the unemployment rate soaring to more than 20 percent in the first quarter.

The socialist government this year launched tough austerity measures aimed at shoring up Spain's public finances amid concerns it could follow Greece into a financial crisis.

It is also pushing reforms of its rigid labour market to bring down the unemployment rate and slash jobless benefits.

Moody's warned that it could take several years for the economy to adjust to the fallout of the collapse of the property boom, "to reduce the high level of private sector indebtedness to levels more in line with other EU countries, and to find new, internal sources of economic growth."

The agency said it expects economic growth to average slightly more than 1.0 percent over the 2010-2014 period.

However, it said the government's efforts to push through structural reforms are "positive developments that could help revive Spain's growth potential in the medium term.

"The review of Spain's sovereign rating will assess the broader political commitment to structural reform and the likelihood that the reforms approved by parliament will be far-reaching enough to significantly stimulate long-term growth."

© 2010 AFP

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