Fresh downgrade hits Spain amid euro fears

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Pressure mounted on Spain Wednesday over its high debts after Moody's joined other big credit raters in downgrading its sovereign rating, damaged by the eurozone finance crisis.

Moody's cut Spain's rating by two notches from A1 from Aa2, with a negative outlook, "to reflect the downside risks from a potential further escalation of the euro area crisis."

"The already moderate growth prospects for Spain have been scaled back further in view of the worsening global and European growth outlook and the difficult funding situation for the banking sector and its impact on the wider economy," it said in a statement.

The downgrade came days after a similar move from Standard & Poor's, which last week cut Spain's sovereign rating from AA to AA-minus, with a negative outlook. Fitch Rating slashed Spain's rating by two notches earlier this month.

Describing a now familiar malaise of slow growth and crushing private and public debt, Moody's in effect issued a vote of no confidence in Spain and the European Union's handling of the crisis so far.

"Since placing the ratings under review in late July 2011, no credible resolution of the current sovereign debt crisis has emerged," it said in a statement.

"Spain's large sovereign borrowing needs as well as the high external indebtedness of the Spanish banking and corporate sectors render it vulnerable to further funding stress."

It warned that stress would be further exacerbated by slow growth, which would make budget cuts even more painful for whichever government emerges from general elections on November 20.

Spain has suffered hugely from the global financial crisis and the bursting of a domestic housing bubble in 2008. Unemployment is at more than 20 percent and big spending cuts are hitting healthcare and education.

"Spain continues to face significant challenges arising from the severe situation in the labour market, slowdown in its key export exports affecting its economic growth and a fragile banking sector," Moody's said.

It forecast economic growth of "one percent at best" in 2012, compared with earlier forecasts of 1.8 percent, saying Spain, in particular its regional authorities, would struggle to meet targets for lowering the deficit.

Moody's has also downgraded the debt of Italy and Belgium over similar concerns.

Analysts warned the hardship could worsen in Spain and the rest of the eurozone if EU leaders at a summit on Sunday fail to end a debt crisis which is undermining the stability of the euro.

"If the solution to the debt problem this weekend does not give a clear message, the growth prospects for Europe in general will weaken," prompting more downgrades, said Alberto Roldan of Spanish investment group Inverseguros.

"If no solution is reached, Spain could suffer," said Jesus Castillo, a southern Europe analyst at Natixis bank.

"There will be stronger pressure from the markets and therefore higher financing costs which lead to a weakening of its financial situation."

© 2011 AFP

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