Moody’s sliced Spain’s credit rating last Thursday and warned it may do so again, pounding financial markets as it raised the alarm over Spanish banking woes and spendthrift regions.
New York-based Moody’s cut the long-term debt rating by a notch to ‘Aa2’ with a negative outlook, a serious setback to Spain’s efforts to quell fears it may need an international financial rescue.
The downgrade came on the eve of a eurozone summit in Brussels to discuss bolstering the euro’s defences amid growing speculation that weak member states such as Portugal may follow Ireland and Greece and need massive bailouts.
Spain’s government bristled at the decision.
Moody’s could have resolved its doubts over the cost of recapitalising the banks “simply by waiting until this afternoon for the Bank of Spain to confirm the necessary amounts,” Finance Minister Elena Salgado said.
The finance minister agreed however that more should be done to control spending by semi-autonomous regional governments.
Markets tumbled after the Moody’s announcement, which followed a three-month review of Spain’s credit. The agency withdrew its top-notch ‘Aaa’ rating from Spain in September, a few months after its rivals Standard and Poor’s and Fitch had done so.
The euro traded at $1.3828 a few hours after the Moody’s downgrade from $1.3868 beforehand. The Madrid stock market’s IBEX-35 index slipped 1.30 per cent to 10,422.0 in early afternoon.
The annual interest rate, or yield, demanded by the market in return for buying Spanish 10-year bonds rose to 5.51 per cent from the previous day’s close of 5.48 per cent, approaching what are seen as punitive levels at six per cent.
Moody’s Investors Service expressed scepticism about Madrid’s assumption it can clean up savings banks’ balance sheets at a cost of less than €20 billion.
“The eventual cost of bank restructuring will exceed the government’s current assumptions, leading to a further increase in the public debt ratio,” it said in a statement.
Spain’s savings banks are still struggling under the weight of loans that turned sour after the 2008 property bubble collapse, and Moody’s put the price at €50 billion.
Another ratings agency, Fitch, said the savings banks would need €19.4 billion “in a base-case stress scenario” and 54.7 billion “in a more extreme stressed scenario based on experience with banks in Ireland”.
But Fitch “does not expect credit losses in Spain will be as high as those in Ireland as the dynamics of the two countries’ residential mortgage lending and commercial real estate sector are different.”
Moody’s said it also had concerns over Spain’s efforts to create sustainable public finances, given the limits of Madrid’s control over the regional governments’ spending.
French bank Natixis’ Spanish analyst Jesus Castillo said the costs of recapitalising the banks should be manageable, even if higher than expected, but warned that the big problem was weak economic growth.