Moody’s downgrades Spanish debt

Madrid, Oct 1 (IANS/EFE) Rating agency Moody’s Investor Service Thursday downgraded Spain’s sovereign debt by one notch from AAA to Aa1 with a stable outlook, citing weak economic growth prospects and other factors.

Moody’s also pointed in its report to the Iberian nation’s large deficit and noted that rising interest payments as a share of revenues make the Spanish government “very vulnerable” to future market volatility.

It also said “the process of rebalancing the economy away from the construction and real-estate sectors will likely take several years”.

In Spain, the effects of the global recession were aggravated by the collapse of a long construction and property boom that made the country’s economy the envy of most of Madrid’s partners in the European Union.

The downgrade, which follows moves earlier this year by Standard & Poor’s and Fitch Ratings to strip away Spain’s AAA credit rating, comes a day after unions in Spain staged a general strike against a labour overhaul and austerity measures.

Additionally, the government Thursday submitted to parliament its belt-tightening 2011 budget, which calls for a 7.9 percent cut in spending for next year and a tax hike on higher incomes.

According to Moody’s lead analyst for Spain, Kathrin Muehlbronner, Spain’s economy is projected to grow at only 1 percent annually over the next few years, compared with around 2 percent in Britain, nearly 2 percent in Germany and 1.5 percent in France.

The rating agency said Spain’s low productivity and lack of competitiveness are its main challenges but it also hailed a recent overhaul of labour laws as a step in the right direction.

The results of recent bank stress tests in July also show the government has taken appropriate action to restructure the country’s financial sector, the report said.

Moody’s noted that the government intends to reduce the public deficit to 6 percent of gross domestic product next year, but it added that, although it expects that target will be met, a greater reduction in the deficit will require further cuts to public spending.

“Spain is a credible, reliable country in which there’s no risk whatsoever of bankruptcy,” the country’s economy minister said Thursday after Moody’s announced the downgrade.

“We have to respect their work and that of all the rating agencies,” Elena Salgado said in an interview with Italian newspaper Il Sole 24 Ore.

“Spain has had a negative outlook for some time,” she said, recalling that “the triple-A status was acquired for the first time in 2004, when the country had posted strong growth since 1997″.

At the same time, the minister acknowledged that Spain “is recovering slowly” and said the economy was unlikely to exceed 2 percent annual growth before 2012.

She said that the austerity measures adopted by the government “have been important and sufficient” and that “new sacrifices” will not be needed to meet the goal of reducing the budget deficit to 3 percent of GDP by 2013.

Asked about the assessment by Moody’s and other analysts that Spain is lagging behind other European countries in terms of competitiveness, the minister noted that within the 27-member European Union only Germany and Spain are running external trade surpluses.

“This means our exported products are competitive,” she said.

With respect to the nation’s 20 percent unemployment rate, the economy minister said “Spain must come to grips with the fact that private enterprise must create jobs and not the public sector”.

Salgado also pointed out that Spain had unemployment of 8 percent even when the economy was growing at 4 percent annually.

–IANS/EFE