Moody’s removes Spain’s AAA rating

City A.M. Reporter
RATINGS agency Moody’s cut Spain’s credit to Aa1 from AAA yesterday, removing the last of its highly-valued triple-A ratings but saying it did not expect to cut again soon thanks to efforts at fiscal reform.

The one notch downgrade was widely discounted by the markets, following cuts by Standard and Poor’s in April and by Fitch in May.

Spain is one of the countries being watched most closely by financial markets in Europe’s struggle with billowing debt, but investors have so far given it an easier ride than Ireland and Portugal.

Moody’s said a key driver for the downgrade was the significant fiscal deterioration that Spain experienced and the challenges the government will face in reducing the budget deficit in an environment of only moderate economic growth.

It said it expected the economy to grow just one per cent annually on average for years to come. The government should be able to meet its targets this year and next but further reforms were needed to cut the deficit beyond 2011.

“A large part of the fiscal consolidation for this year and next is based on tax increases and measures that cannot be continued for many years,” Moody’s lead analyst for Spain Kathrin Muehlbronner said.

“Spain will need more structural measures to bring down its deficit,” she said.

The rebalancing of Spain’s economy away from construction will also take several years.

“Spain’s economy adjustment process is ongoing – household leverage is still high, there's a large overhang of unsold properties and while exports have picked up nicely they are still dependent on what happens in France and Germany,” Muehlbronner said.