Moody’s Investors Service downgrades Spanish government debt

Thursday, September 30, 2010

Moody’s downgrades Spanish government debt

MADRID — Moody’s Investors Service downgraded Spain’s government debt Thursday, joining two other major credit rating agencies who have taken similar steps out of concern over the country’s bloated public finances and weak growth prospects.

The London-based agency lowered the rating by one notch, from Aaa to Aa1, with a stable outlook. It said slow economic growth would hinder Spain’s efforts to aggressively cut its deficit and keep its top credit rating.

The move came a day after a general strike when Spanish workers staged a national protest against government austerity policies aimed at improving Spain’s finances.

The country has been a focus of market concern that its bloated deficit and weak economy might eventually require a bailout of the kind that saved Greece from bankruptcy in May.

Spain is struggling to escape from a recession that followed the collapse of its construction sector, which had been a key engine of growth during a decade-long boom. Spain is one of the eurozone’s most fiscally troubled members along with Greece, Ireland and Portugal.

The economy contracted by 3.7 percent in 2009, and the jobless rate of 20.09 percent is a 13-year high and the worst in the 16-nation euro zone.

The difficulties in generating wealth make it hard for the government to find revenue for its spending plans.

“One of the key drivers for Moody’s decision to downgrade Spain’s rating to Aa1 is its weak growth prospects and the challenge that this presents for fiscal consolidation,” said Kathrin Muehlbronner, a Moody’s Vice President and lead analyst for Spain.

“Over the next few years, the Spanish economy is likely to grow only by about 1 percent annually on average. Growth rates in the rest of the EU are likely to be higher but also sluggish. Moody’s expects growth to average around 2 percent for the UK, 1.5-2 percent for Germany and around 1.5 percent for France in the coming years,” she said in a statement.

The other two rating agencies, Standard & Poor’s and Fitch, downgraded Spanish debt in late April and late May respectively.

While moderate growth makes it difficult for the government to cut the budget deficit, Moody’s expects efforts to find sources of growth away from the real-estate sector to take several years.

As another reason for the downgrade Moody’s cited “considerable deterioration of the Spanish government’s financial strength, as reflected in a more pronounced fiscal deterioration compared to Aaa-rated sovereigns”.

Moody’s also cited worsening debt affordability, or interest payments as a share of revenues, and significant borrowing requirements. It said this means the government remains vulnerable to market volatility.

Recent labor market reforms, including changes that make it easier and cheaper for companies to lay people off, and recent signs of wage restraint in the private and public sectors are positive signs, Moody’s said. Even so, it noted that the cost of dismissing workers is still higher than the European Union average.

The agency expects Spain to meet its deficit target of 6 percent of GDP next year but noted that further cuts will be required beyond 2011.

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