Moody's downgrades Spain, cites bank weakness

10th March 2011, Comments 0 comments

Moody's cut Spain's credit rating Thursday and warned it could do so again because of the nation's banking woes and spendthrift regions, sending the euro tumbling.

It cut the long-term debt rating by a notch to "Aa2", a serious setback to Spain's efforts to quell fears it might yet be engulfed in the eurozone credit quagmire that has trapped Greece and Ireland.

Moody's also put a negative outlook on the rating, meaning it could be downgraded further.

The euro retreated to $1.3817 after the downgrade from $1.3868 a few hours 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.

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 government finances, given the limits of Madrid's control over the regional governments' spending.

Spain's government has enacted a series of reforms to ease market fears about its high annual deficits and the sluggish economy, encumbered by an unemployment rate of more than 20 percent at the end of 2010.

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.

The credit rating downgrade means investors will tend to demand higher interest rates before taking the risk of lending to Spain.

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

At the same time, the economy is set for only moderate economic growth in the short to medium term.

"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," the agency said.

Moody's downgrade comes just before eurozone leaders meet in Brussels to discuss ways to bolster the euro's defences.

Weakening public finances in several smaller member states are stoking speculation that other countries such as Portugal will need to follow Ireland, Greece by asking for an international bailout.

Greece and Ireland turned to the European Union and IMF for financial lifelines last year when they could no longer raise fresh money from the markets at sustainable rates.

In recent days investors have been demanding ever higher returns to lend to them again.

Portugal said earlier this week that it would not seek a bailout but the markets are betting that it will, and sooner rather than later.

Moody's slashed its Greek ratings on Monday by three notches and warned they could be downgraded further given the risks to the country's stabilisation efforts.

© 2011 AFP

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