Spanish government rating slashed to just above junk

14 June 2012 | By Gary Jackson

The credit ratings agency took the country’s rating to Baa3 from A3, citing plans for the government to borrow up to €100 billion (£80.6 billion) to recapitalise banks, its “very limited” financial market access and continued weakness in the economy.

Moody’s also says Spain’s rating has been placed on review for a further downgrade. This review is expected to last no more than three months.

Spain’s borrowing costs rose after the downgrade, with the yield on 10-year bonds exceeding 6.85%. This is considered to be unsustainable in the long term by analysts and other eurozone members have sought bailouts when they hit 7%.

Offering the rationale for the three-notch cut, Moody’s notes that plans to seek external funding from the European Financial Stability Facility (EFSF) or the European Stability Mechanism (ESM) will led to a higher debt burden for the country.

“Moody’s now expects Spain’s public debt ratio to rise to around 90% of GDP this year and to continue rising until the middle of the decade. Stabilising the ratio will be a key challenge for the Spanish authorities, requiring years of continued fiscal consolidation,” it reports. (article continues below)

“As a consequence, the government’s fiscal and debt position is no longer commensurate with a rating in the A range or even at the top of the Baa range.”

The agency adds that Spain’s decision to seek funds from the EFSF or the ESM demonstrates how limited its access to financial markets has become, while continued economic weakness heightens concerns over the government’s weakening financial strength.

Moody’s also explained how the ongoing downgrade review will be carried out.

The group writes: “The review for downgrade will focus on the outcome of the ongoing external audits of the Spanish banking system, the conditionality and details of the EFSF/ESM loan agreement, and the specific execution strategy developed for the banking system’s recapitalisation.”

Further initiatives at the eurozone level will also be considered in the review, while the agency warns that Spain’s rating could be adversely affected if the risk of Greece leaving the currency bloc were to increase further.

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