Moody’s credit rating agency has put Spain’s sovereign bonds under review with a prospect to knock down its favorable Aa2 grade. Moody’s has also downgraded six areas of the country citing “deterioration in their fiscal and debt positions.”
Moody’s Investors Service placed Spain’s Aa2 government bond ratings on review for possible downgrade. In their Friday announcement they cited “the increased vulnerability of the Spanish government’s finances to market stress; the country’s weak economic growth and budget deficits in several regions, which have shown bigger numbers than expected.”
The agency dubbed it a bad sign that the country’s own credit rating grade is slipping close to that of its most prominent banks. When the sovereign debt is rated at or close to the standalone ratings of the banks, the benefit of assumed government support would be diminished, the debt-rater assessed.
The US-based agency also says Spanish bondholders are now at greater risk after the approval of $155 billion Greek bail-out package last week in Brussels summit.
“The official support package for Greece announced last week somewhat increases the potential for adverse market dynamics,” said Moody’s, partly because of “the uncertainties surrounding the content of the package.“
Moody’s will review the debt and deposit rating of five Spanish financial institutions, which, according to the agency, may downgrade Spain’s sovereign debt. The agency has put the highest-rated banks in the country under the re-evaluation procedure, such as Banco Santander SA, Banco Bilbao Vizcaya Argentaria SA and CaixaBank SA. The five banks are at, or close to, the Aa2 rating of Spain.
Meanwhile, the agency started downgrading the country step by step. In its first move, the agency has downgraded the long-term ratings by one notch for Castilla-La Mancha, Catalonia and four other regions in Spain. After that the ratings agency declared that seven more Spanish regions will be reviewed, including the regional governments of Madrid, Extremadura and the Basque region.
Spain’s economy minister, Elena Salgado, said on Friday that credit rating agency Moody’s placing Spain on watch for a downgrade was not good news. Meanwhile, the Treasury criticized the move, saying it is based on short-term estimates.
“It is the opinion of the Spanish government that the external arguments supporting this revision rely excessively on short-term market developments,” the Treasury said in a letter to investors, as cited by Reuters.
Spain has suffered from a stagnant economy and high unemployment which, despite being lowered to 20.9 per cent in the second quarter, remains the highest in the eurozone. The country is referred to as one of the PIIGS, which also includes Portugal, Ireland, Italy and Greece. All these countries are facing the most acute fiscal problems in the EU.
The country is beset by protests. Just last Sunday a huge crowd gathered in Madrid to show their discontent with the current economic situation.