Spain’s bond rating downgraded to Baa3

Moody's Investor Services
Further downgrades for Spain

Following the request for a bank bailout from Europe Spain has once again seen it’s government bond rating downgraded, this time from A3 to Baa3, with review for a possible further downgrade.

Ratings and research agency Moody’s said the downgrade was in part due to the request for 100 billion euros to bailout Spain’s ailing banking sector which, say’s Moody’s, will further increase the country’s debt burden which has risen consistently and dramatically since the crisis began.

In a press release Moody’s said “The Spanish economy’s continued weakness makes the government’s weakening financial strength and its increased vulnerability to a sudden stop in funding a much more serious concern than would be the case if there was a reasonable expectation of vigorous economic growth within the next few years.”

The bailout request is twice the size of previous estimates, although it has been said that once independent reviews have been completed the actual requirement is likely to be nearer to 60 billion. However, the 100 billion euros seems to have been pre-approved, although details of the bailout have yet to be released.

Moody’s went on to say that while the details of the package have yet to be announced, it seems clear that the responsibility for supporting Spanish banks rests on the shoulders of the Spanish government. European Financial Stability Facility (EFSF) funds will be lent to the government which will use the cash to recapitalise it’s banking sector.

“This borrowing will materially worsen the government’s debt position: Moody’s now expects Spain’s public debt ratio to rise to around 90% of GDP this year and to continue rising until the middle of the decade. Stabilising the ratio will be a key challenge for the Spanish authorities, requiring years of continued fiscal consolidation. As a consequence, the government’s fiscal and debt position is no longer commensurate with a rating in the A range or even at the top of the Baa range.”

Moody’s placed Spain on review for possible further downgrades in order to properly assess the ability of the Spanish government to to fund its borrowing requirements in the private debt markets. They also said any further downgrades will depend on the full details of the bailout and the results of the independent audit which are due to be released in July.

You can read the full report from Moody’s here: Moody’s downgrades Spain’s government bond rating