Moody’s puts Spain ‘on review’ for downgrade

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.”

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

Spain’s treasury director, Soledad Nunez, expressed confidence that the government can head off the Moody’s downgrade.

“Within this three-month review period, the Spanish government can demonstrate that its reform plans will yield results … on its labor reform plans, the restructuring of the country’s banking system and also through the release of stress tests of the country’s banks,” she said.

Spain plunged into its worst recession in decades at the end of 2008 following the collapse of a decade-long property boom.

Last month, it 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 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.

And on Tuesday, the Bank of Spain said a consolidation process involving 39 of the country’s 45 struggling regional savings banks was almost complete.

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.”

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.”

— With Dow Jones newswires —