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Home > Investments > European

By Bradley Gerrard | Published Jun 14, 2012

Moody’s downgrades Spain to one notch above ‘junk’

Moody’s Investors Service has downgraded Spain’s government bonds to the lowest investment grade rating and has placed the nation on review for a possible further cut.

Moody’s downgraded Spain from A3, the equivalent of A-, to Baa3, the equivalent of BBB-, the lowest rating for investment grade bonds. Any additional reductions would see the nation assume high yield or so-called “junk” status.

The rating agency said the decision to downgrade the country was driven by Spain’s intent to borrow €100bn (£81bn) from the European Financial Stability Facility (EFSF), a eurozone bailout fund, or from that fund’s successor, the European Stability Mechanism (ESM), to recapitalise its banking system.

Moody’s said Spain has “very limited financial market access” and has a “growing dependence” on its domestic banks as the primary purchasers of its new bond issues, who in turn obtain funding from the European Central Bank.

On Tuesday this week, Spanish 10-year government bond yields hit euro era highs, surging to 6.8 per cent, up 0.3 percentage points on the day and the highest yield seen since the eurozone was formed.

“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,” Moody’s added.

The rating agency said the decision to leave the government rating in investment grade, rather than cutting it to ‘junk’ status, reflects the “underlying strength of the Spanish economy and the government’s clear desire to reverse the debt trajectory through a strong fiscal consolidation programme”.

“Moody’s also acknowledges several factors that differentiate the current programme from the support packages extended to Ireland, Portugal and Greece,” it said. “In particular, the size of the support package is significantly smaller than it is in the other cases.

“The maximum amount of €100bn equates to approximately 10 per cent of Spain’s GDP, compared with more than 54 per cent of GDP in the case of Ireland, 114 per cent of GDP in Greece and 46 per cent of GDP in Portugal.”

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