Moody’s downgrades Spanish debt ratings

NEW YORK - The Associated Press

Spanish secondary school students support their teachers who were reacting against the government’s bugdet cuts during an Oct 6 demonstration in Madrid. REUTERS photo.

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,” said the agency.

Moody’s expects Spain’s real gross domestic product growth in 2012 to be 1 percent at best, compared with earlier expectations of 1.8 percent. In coming years, the ratings agency expects a moderate growth rate of around 1.5 percent per year.