Spain’s credit rating downgraded to A3

Moody's Investor Services
Another downgrade for Spain

Ratings agency Moody’s have once again downgraded Spain’s government bond rating, this time from A1 down to A3, whilst placing France, Austria and the UK, on negative outlook. The UK is facing the prospect of losing it’s precious Aaa rating.

One of the main reasons cited for the downgrade is the “uncertainty over the prospects for institutional reform in the euro area and the weak macroeconomic outlook across the region, which will continue to weigh on already fragile market confidence.”

Moody’s say that weak prospects can complicate the implementation of austerity measures and structural reform that are needed to promote competitiveness.

Further reasons for the downgrade include Spain’s poor fiscal outlook which is being exacerbated by a large deficit in 2011, mainly due to budget overspend by Spain’s regional governments. Moody’s is sceptical that Mariano Rajoy’s new conservative government will be able to meet the targeted reduction in the budget deficit, leading to further increases in the public debt ratio.

The Spanish economy is close to falling into another recession and the pressure will be further increased by the need for even stronger action to meet the deficit target. A renewed recession will also negatively affect the profitability of Spanish banks at a time when they are being asked to clean up their balance sheets.

Spain saw it’s  GDP contract by 0.3% quarter-on-quarter in Q4 of 2011. Moody’s now expects Spain’s GDP to further contract by 1%-1.5% in 2012. This is in contrast to forecasts from just a few months ago when low but positive growth of around 1% was predicted.

Moody’s say they are maintaining a negative outlook on Spain’s sovereign rating. This reflects the potential for a further decline in economic and financing conditions as a result of the continuing euro-zone debt crisis. The report also says that Spain’s outlook “could be stabilised at the current level if the wider euro area situation were to be resolved conclusively.”

Full report from Moody’s: Moody’s adjusts ratings of 9 European sovereigns to capture downside risks