Spain under new pressure after Moody's warning

29th July 2011, Comments 0 comments

Spain's battered economy suffered more bad news Friday as Moody's threatened to downgrade the country's rating and that of four major banks, while the unemployment rate remained the highest in the industrialised world.

Spain, with an economy the size of the Greek, Irish and Portuguese economies combined, has been battling to convince markets that it should not be lumped together with the three lame ducks now under EU and IMF rescue programmes.

But it continues to suffer from the risk of contagion from the crisis.

Moody's announced that it was planning to downgrade Spain's debt rating, currently at a "Aa2", due to the country's budget problems.

It said that the pressure on Madrid could be exacerbated by fears over the new European deal to rescue Greece which had "created a precedent" by involving the private sector and signaled a growing risk for investors holding bonds in the fragile countries of the eurozone.

After a three-month examination period, the agency could lower Spain's rating, already downgraded in 2010, but it "would probably be limited to one notch", Moody's said.

As a result of that, Moody's said it also planned to lower the ratings of four major Spanish banks -- Santander, the eurozone's largest, BBVA, CaixaBank and La Caixa -- and the country's confederation of savings banks, the CECA.

"When a sovereign's credit worthiness diminishes, Moody's reassesses the capacity of the sovereign to provide systemic support to domestic banks."

Spanish banks, particularly its regional savings banks, have been struggling with the economic downturn, brought about by a collapse of the country's once booming property market in 2008.

The Madrid stock market reacted to Moody's announcement by losing 1.42 percent by mid-morning.

The agency said it had also decided to downgrade by a notch six Spanish regions, including the powerful Catalonia region, due to "the deterioration in their fiscal and debt positions."

Spain's regional government debt, at about 121 billion euros ($174 billion), is a major concern for markets which fear it could compromise the central government's goal to cut the annual public deficit from 9.24 percent of Gross Domestic Product in 2010 to 6.0 percent this year, and to a eurozone limit of 3.0 percent in 2013.

The government has enacted measures to strengthen bank balance sheets, cut state spending, raise the retirement age, liberalise the labour market and sell off assets in a bid to calm nervous markets.

But investors have pushed Spanish government borrowing costs ever higher in recent weeks.

Earlier this month, Spanish 10-year bond yields rose above 6.0 percent, the highest level since 1997, on contagion fears.

"Spain's fiscal consolidation plans is challenged by the weak growth environment and slippage in regional governments' budget execution," said Christian Schulz, senior economist at Berenberg Bank in London.

"This is despite the acknowledgement that the central government is well inline with plans on budget execution. The growth risk is seen mainly in domestic demand, where high private sector debt levels and a weak real estate market are expected to weigh on consumption."

In another blow to the government's efforts to revive the economy, official data Friday showed that the jobless rate in the second quarter remained the highest in the European Union and in the countries of the Organisation for Economic Cooperation and Development (OECD).

However, the rate eased slightly, to 20.89 percent from 21.29.

The government sought to put the best face on the figures, with Finance Minister Elena Salgado saying they showed a "change in tendency".

Unemployment soared in Spain after the collapse of the property bubble in 2008, which helped plunge the country into recession. The economy stabilised in 2010 and has shown slow growth in early 2011.

The government has revised downwards its jobless forecast for 2011, to 19.8% from 19.3% previously.

Madrid has also cut its growth predictions for 2012 and 2013, forecasting 2.3% and 2.4% respectively, instead of 2.5% and 2.7%.

© 2011 AFP

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