Moody's downgrades Spain credit rating

10th March 2011, Comments 0 comments

Moody's sliced Spain's credit rating Thursday and warned it may do so again, pounding financial markets as it raised the alarm over Spanish banking woes and spendthrift regions.

New York-based Moody's cut the long-term debt rating by a notch to "Aa2" with a negative outlook, a serious setback to Spain's efforts to quell fears it may need an international financial rescue.

The downgrade came on the eve of a eurozone summit in Brussels to discuss bolstering the euro's defences amid growing speculation that weak member states such as Portugal may follow Ireland and Greece and need massive bailouts.

Spain's government bristled at the decision.

Moody's could have resolved its doubts over the cost of recapitalising the banks "simply by waiting until this afternoon for the Bank of Spain to confirm the necessary amounts," Finance Minister Elena Salgado said.

The finance minister agreed however that more should be done to control spending by semi-autonomous regional governments.

Markets tumbled after the Moody's announcement, which followed a three-month review of Spain's credit. The agency withdrew its top-notch "Aaa" rating from Spain in September, a few months after its rivals Standard & Poor's and Fitch had done so.

The euro traded at $1.3828 a few hours after the Moody's downgrade from $1.3868 beforehand. The Madrid stock market's IBEX-35 index slipped 1.30 percent to 10,422.0 in early afternoon.

The annual interest rate, or yield, demanded by the market in return for buying Spanish 10-year bonds rose to 5.51 percent from the previous day's close of 5.48 percent, approaching what are seen as punitive levels at six percent.

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 and Moody's put the price at 50 billion euros.

Another ratings agency, Fitch, said the savings banks would need 19.4 billion euros "in a base-case stress scenario" and 54.7 billion "in a more extreme stressed scenario based on experience with banks in Ireland."

But Fitch "does not expect that credit losses in Spain will be as high as those in Ireland as the dynamics of the two countries' residential mortgage lending and commercial real estate sector are different."

Moody's said it also had concerns over Spain's efforts to create sustainable public finances, given the limits of Madrid's control over the regional governments' spending.

French bank Natixis' Spanish analyst Jesus Castillo said the costs of recapitalising the banks should be manageable, even if higher than expected, but warned that the big problem was weak economic growth.

"We are more concerned by the ability of the Spanish economy to recover a solid growth path able to reduce the large unemployment rate -- more than 20 percent at the end of 2010 -- and to allow a fiscal consolidation in the mid-term," Castillo said.

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.

It has vowed to drive its public deficit below the European Union limit of 3.0 percent of gross domestic product by 2013.

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

"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," Moody's said.

The EU's executive Commission said on Thursday it would propose within six months fundamental reforms on the regulation of financial ratings agencies, following the downgrades of Spain and Greece.

Greece's finance minister has called for "urgent" steps by the eurozone to regulate credit rating agencies after the country was hit with a damaging downgrade by Moody's earlier this week.

© 2011 AFP

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