Spain hit by Moody’s debt downgrade

EUROPE’S sovereign debt fears resurfaced yesterday when rating agency Moody’s downgraded Spain by one notch and warned of further cuts.

The sovereign debt rating cut, to Aa2 from Aa1, put pressure on the euro and pushed up Spain’s ten-year bond borrowing costs.

The agency said it feared that restructuring Spain’s banks could cost €50bn (£43m) – more than double the €20bn forecast by its government.

“Moody’s continues to have concerns over the ultimate cost of recapitalising the saving banks,” it said in a statement, adding that it “believes there is a meaningful risk that the eventual cost of the recapitalisation effort could considerably exceed the government’s current projections.”

It also said government finances were unlikely to improve, largely because it could not force regional authorities to be more disciplined.

“Spain’s substantial funding requirements – not only those of the sovereign, but also those of the regional governments and the banks – make the country susceptible to further episodes of funding stress,” it said.

Kathleen Brooks, research director at forex.com, said the timing of the rate cut, hours before the Bank of Spain released its own report on banks’ capital needs, caused “a large knee-jerk reaction with the euro sold across the board”.

But she said it reassured as well. “The crucial point to note in Moody’s announcement is that it does not think that Spain’s debt burden is unsustainable and thus it is optimistic that Spain will avoid the need for a bailout,” she said. Moody’s said the recapitalisation was likely to cost €40-50bn but could rise to €110-120bn.