Spain’s Aaa Rating on Review for Downgrade at Moody’s

Spain’s Aaa Rating on Review for Downgrade at Moody’s (Update2)

By Emma Ross-Thomas

June 30 (Bloomberg) -- Spain’s top credit ranking was placed on review for a possible downgrade by Moody’s Investors Service, which cited “deteriorating” growth prospects and the challenges the government faces to achieve its fiscal targets.

Spain’s Aaa classification may be lowered as much as two grades, Moody’s analysts including Senior Vice President Kristin Lindow in New York said today in a statement. The review will be concluded within a three-month period, the ratings company said.

The moves comes a day before Spain is due to sell as much as 3.5 billion euros ($4.3 billion) of five-year notes and puts pressure on the Socialist government to deepen spending cuts as it starts drafting next year’s budget. Fitch Ratings and Standard & Poor’s already stripped Spain of their top ratings.

“It will add to the general nervousness before the Spanish auction tomorrow,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “The move shouldn’t come as too much of a surprise as Spain has already lost its triple-A rating with the other two agencies.”

U.S. stocks extended losses and the euro trimmed gains against the dollar after the announcement from Moody’s, which is the latest blow to the euro-area as its members seek to escape a debt crisis. Single currency members including Greece and Portugal have all had their sovereign ratings lowered on concern they will struggle to cut their budget deficits to within European Union limits.

Auction Demand

Prior to Moody’s decision, investors had expected strong demand at the five-year note auction on easing concerns about the region’s banks after lenders sought less cash than forecast at a European Central Bank tender. The extra yield demanded on Spanish debt rather than German equivalents fell to 198.4 basis points today from 204.9 basis points. That compares with a euro- era high of 221 basis points on June 16.

Spain, which faces 24.7 billion euros of maturing debt in July, is trying to convince investors it can cut the third- largest deficit in the euro region, while bolstering the country’s savings banks and lifting the economy out of a two- year slump. The July debt redemptions are the largest for the rest of the year and the government has said it will have no trouble making the payments, which coincide with some of the largest tax revenue of the year.

Moody’s said it will “review” next year’s budget “to assess whether the deficit target for 2011 can be achieved.” That increases pressure on the minority Socialist government, which cut civil servants’ wages this month and will increase the value-added tax rate tomorrow, as it starts drafting next year’s budget ahead of its presentation to Parliament by the end of September.

Deficit Cuts

The government expects to cut the budget deficit to 6 percent of gross domestic product next year from 11.2 percent in 2009, aiming to bring the shortfall in line with an EU limit of 3 percent in 2013. Moody’s expects the deficit to remain “just over” 5 percent that year, lead Spain analyst Kathrin Muehlbronner said in a telephone interview.

That will push the debt ratio to close to 80 percent by 2014, she said. Last year Spain’s debt burden was 53 percent of GDP, less than Germany’s and below the euro region average.

Moody’s also forecasts less economic growth than Spain’s Finance Ministry as budget cuts threaten the recovery. Moody’s projects that the economy will expand by an average 1 percent a year through 2014, while the government expects growth to accelerate to 2.7 percent in 2013.

Fitch Ratings also cited growth concerns when it cut Spain to AA+ on May 28. Standard & Poor’s ranks the nation AA, having stripped Spain of the top rating in January 2009.

“The general consensus is that it’s a bit overdue. It’s late, it’s old news,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut.

“You’d need something genuinely new, like the prospect for downgrades across Europe, to have the market reacting to it,” he said.