Moody's says Spanish budget deficit cap positive

29th August 2011, Comments 0 comments

Moody's said Monday an agreement by Spain's main political parties to introduce a law to cap the long-term public deficit was a positive move for the struggling eurozone member's credit rating.

"Although it would have been preferable to include the maximum allowable deficit in the constitution itself ... and introduce clear correction and sanction mechanisms in case of deviation, the announcement is credit positive for Spain's sovereign and sub-sovereigns," Moody's Investors Service said in its weekly credit outlook.

The ratings agency, which last month put Spain's Aa2 sovereign rating on review for a downgrade due to concerns it would be able to meet its deficit reduction targets, said it would take the rule into consideration.

Spain's ruling and opposition parties bridged bitter rivalry and struck a deal last week to cap the long-term public deficit and fend off fears of a state debt crisis.

The ruling Socialist and conservative opposition Popular Party set a maximum structural or long-term deficit in the annual budget of 0.4 percent of gross domestic product (GDP) from 2020.

Only the broad principles of a balanced long-term budget are to be enshrined in the constitution, however, while the 0.4-percent figure on the deficit limit will be introduced in an accompanying law.

Moody's said as the proposed fiscal rule would apply to all levels of government it was an improvement over a previous agreement under which regions only pledged voluntarily to limit their deficits.

Spain's highly autonomous regions, which are responsible for about a third of state spending, have been the source of much of the concern about whether the eurozone member will meet its fiscal targets.

Markets earlier this month drove up Spain's borrowing costs to unsustainable levels, pushing the European Central Bank to intervene by buying Spanish bonds on secondary markets to drive down yields.

"Spain's initiative will make ongoing support, including the ECB's bond buying programme, easier to justify and more likely to happen," noted Moody's.

© 2011 AFP

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