Thaindian News

Madrid, March 11 (IANS/EFE) Moody’s downgraded Spain’s debt rating Thursday from Aa1 to Aa2 with a negative outlook, citing high bank recapitalisation costs.

Six months after stripping Spain of its highest-quality Aaa rating, the credit rating agency justified the latest downgrade by saying “the eventual cost of bank restructuring will exceed the government’s current assumptions, leading to a further increase in the public debt ratio”.

It added that while Prime Minister Jose Luis Rodriguez Zapatero’s administration has estimated that recapitalising the banking sector will cost a maximum of 20 billion euros ($27.6 billion), the overall cost is likely to be as high as 50 billion euros ($69 billion).

In a “more stressed scenario”, recapitalisation needs could increase to as much as 120 billion euros ($165.7 billion).

Following Moody’s announcement, Spanish Economy Minister Elena Salgado said Thursday that the 20-billion-euro cost of recapitalising the country’s banks - based on government projections - remains unchanged.

In its statement, Moody’s also cast doubt on the Spanish government’s ability to ensure that different regions meet deficit targets and pointed to expectations for only moderate economic growth in the short to medium term.

Spain’s economy is dealing with the combined effects of the global recession and the bursting of a long-term property bubble.

Spain ended 2010 with a cumulative public deficit equal to 9.24 percent of gross domestic product, down from 11.13 percent of GDP in 2009.

Zapatero’s austerity plan calls for gradually reducing the overall public deficit to 3 percent of GDP by the end of 2013, yet the Socialist government also faces the challenge of fostering growth to reduce unemployment, currently hovering around 20 percent, the highest rate in the 27-member European Union.

For 2011, Spain’s central bank expects “a prospect of slow recovery, very dependent on the external sector” and conditioned by government austerity measures and private-sector deleveraging.

Nevertheless, Moody’s acknowledged the government’s “resolve” in mitigating the weaknesses of the Spanish economy, including a pension overhaul and a “reform to the system of collective bargaining … on the agenda for the end of March at the latest”.

It said it took those steps into account and therefore decided to limit the downgrade to one notch.

The credit rating agency also said Spanish debt sustainability is not in danger and the country should not have to ask for liquidity support from the European Financial Stability Facility, a special vehicle set up by EU states to assist struggling eurozone member countries.

Moody’s judges debt rated Aa2 to be high quality and to pose very low credit risk for investors.

Referring to its decision to assign a negative outlook to Spain’s rating, Moody’s said it reflects its view that “the risks to Spain’s government finances remain skewed to the downside”.

“Spain’s vulnerability to market disruption remains elevated given the high funding requirements, not only for the sovereign but also for the regional governments and the banks,” the rating agency said.

The downgrade caused the risk premium on 10-year Spanish bonds to rise to 228 basis points Thursday relative to German debt, up from 222 basis points at the close of trading on Wednesday.

Also Thursday, Spain’s central bank informed several “cajas” and larger banks - both Spanish institutions and subsidiaries of foreign banks - that they will need to increase their capital to meet new legal requirements.

The Bank of Spain said that 12 lenders will need to raise almost 15.2 billion euros (roughly $21 billion) in additional funds, slightly below its previous forecast and well below the capital shortfall estimated by Moody’s.

–IANS/EFE
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