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Moody's downgrades Spanish government debt ratings

By Eileen Aj Connelly
AP Business Writer / October 19, 2011

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NEW YORK—Moody's Investors Service on Tuesday became the latest ratings agency to downgrade Spain's government bond ratings.

Moody's cut the ratings one notch and issued a negative outlook for the struggling nation's sovereign debt.

The ratings agency downgraded Spanish debt to "A1" from "Aa2," four days after Standard & Poor's cut its rating on the nation's long-term debt. Fitch Ratings likewise cut Spain's rating earlier this month.

After nearly two years of recession, Spanish unemployment is high, credit is tight, the banking sector is weak and the private sector carries heavy debt. The ongoing crisis throughout Europe is further weighing on the nation's attempts to address its problems.

Ratings cuts increase the cost of borrowing, and Spain was already paying higher interest rates because investors are concerned it could be the next country in Europe to require a rescue package

Moody's said Spain continues to be vulnerable to market stress, and since it began reviewing its ratings in July, no resolution to the debt crisis has emerged. The potential for contagion from further shocks and fragility within the country makes a rating in the "A" category more appropriate than "Aa," the agency said.

Spain has the fourth-largest economy in the Eurozone.

Moody's said that even if a solution to the crisis is reached, it will take time for confidence in the nation's political cohesion and growth prospects to be fully restored. "In the meantime, 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."

The agency also noted that worsening outlooks for global and European growth further hamper Spanish prospects, and will make it harder for the country to achieve its targets for reducing its budget deficit.

Specifically, Moody's now expects Spain's real gross domestic product growth in 2012 to be 1 percent at best, compared with earlier expectations of 1.8 percent, and risks point mainly to it coming in even lower.

In coming years, the ratings agency expects a moderate growth rate of around 1.5 percent per year.

That forecast is more optimistic than S&P's, which said on Friday it expects the Spanish economy to grow about 0.8 percent this year and about 1 percent next year.

Moody's kept a negative outlook on Spain's rating to reflect that a further downgrade is possible if the eurozone crisis further escalates.

The ratings agency expects that Spanish elections set for Nov. 20 will produce a government "strongly committed to continued fiscal consolidation." If that does not happen, Spain's rating could be cut again.

A stable outlook could be returned if "a decisive and credible" reform plan emerges, along with a "convincing solution" to the euro area crisis. Moody's noted that "there is now a clear track record of policy action in Spain" that includes labor market and pension reforms, as well as recapitalization of the weak parts of the banking sector.

On Thursday, S&P cut Spain's long-term rating to "AA-" from "AA" with a negative outlook. On Oct. 7, Fitch cut its rating on Spain by two notches to "AA-" from "AA+."