Credit ratings agency Moody’s has slashed Spain’s sovereign credit rating by three notches, saying the newly approved euro zone plan to help Spain’s banks will increase the country’s debt burden.
The agency cut the rating from A3 to Baa3, one notch above junk status. It also placed the country “on review for further downgrade.”
Moody’s justified the action by saying the impending EU rescue of Spanish banks will further increase the country’s debt burden and pointing to the Iberian nation’s “very limited financial market access” and continued economic weakness.
“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 said in a statement.
Euro zone finance ministers agreed on Saturday to lend Spain up to EUR 100 B to shore up its teetering banks.
“In our view, that’s (the aid request) not a sign of strength, that’s a sign of weakness,” Muehlbronner added, noting the Spanish government’s growing dependence on its domestic banks as buyers of sovereign debt.
“We do see an increasing risk of Spain needing to ask for more support in the coming months or in the coming years,” she said.
The main reason for the downgrade was the fact the government needed external aid to recapitalize its financial system, Moody’s senior analyst Kathrin Muehlbronner told Efe.
She said Moody’s sees the request for assistance as a sign of weakness because the Spanish government was unable to shore up its banks on its own.
Moody’s now expects Spain’s public debt to rise to 90% of gross domestic product by year’s end, significantly more than what the agency was expecting and one of the most drastic increases seen in recent years, Muehlbronner said.
In its review for potential further downgrade, Moody’s said it will examine the results of ongoing external audits of Spain’s financial system and the “details” and “conditionality” of the aid announced last week by the Eurogroup meeting of eurozone finance ministers.
Wednesday’s downgrade by Moody’s comes less than a week after Fitch Ratings lowered Spain’s long-term credit rating by three notches and said its outlook for the country was negative.